UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2020

 

OR

 

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

 

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.)

 

2040 Main Street, Suite 225

Irvine, California 92614

(Address of principal executive offices) (Zip Code)

 

888-909-5564

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

None

 

TRTC

 

OTCQX

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐     No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☒

 

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 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 ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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

 

At June 30, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s voting stock held by non-affiliates (based on the closing sale price of the registrant’s Common Stock on the OTC Market Group Inc.’s OTCQX tier, and for the purpose of this computation only, on the assumption that all of the Registrant’s directors and officers are affiliates), was $59,993,444.

 

As of March 23, 2021, there were 234,062,627 shares of common stock issued and 231,754,219 outstanding, 36,076,555 shares of common stock issuable upon the exercise of all of our outstanding warrants and 8,145,323 shares of common stock issuable upon the exercise of all vested options.

 

Documents Incorporated by Reference

 

None

 

 

 

 

TERRA TECH CORP.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2020

 

TABLE OF CONTENTS

 

 

Page

 

PART I

 

Item 1.

Business

4

 

Item 1A.

Risk Factors

9

 

Item 1B.

Unresolved Staff Comments

25

 

Item 2.

Properties

25

 

Item 3.

Legal Proceedings

25

 

Item 4.

Mine Safety Disclosures

25

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

 

Item 6.

Selected Financial Data

27

 

Item 7.

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

28

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

32

 

Item 8.

Financial Statements and Supplementary Data

32

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

32

 

Item 9A.

Controls and Procedures

32

 

Item 9B.

Other Information

34

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

35

 

Item 11.

Executive Compensation

40

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management

44

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

46

 

Item 14.

Principal Accountant Fees and Services

47

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

48

 

Index to Consolidated Financial Statements

F-1

 

Signatures

53

 

Certifications

 

See Exhibits

 

 
2

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

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.

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

 

 
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Table of Contents

 

PART I

 

ITEM 1. BUSINESS

 

Unless the context indicates or suggests otherwise, references to “we,” “our,” “us,” the “Company,” or “Terra Tech” refer to Terra Tech Corp., a Nevada corporation, individually, or as the context requires, collectively with its consolidated subsidiaries.

 

Company Overview

 

Terra Tech is a holding company with the following subsidiaries:

 

·

620 Dyer LLC, a California corporation ( Dyer );

·

1815 Carnegie LLC, a California limited liability company ( Carnegie );

·

Black Oak Gallery, a California corporation ( Black Oak );

·

Bl m San Leandro, a California corporation ( Bl m San Leandro );

·

GrowOp Technology Ltd., a Nevada corporation ( GrowOp Technology );

·

IVXX, Inc., a California corporation ( IVXX Inc. ; together with IVXX LLC, IVXX );

·

IVXX, LLC, a Nevada limited liability company ( IVXX LLC );

·

MediFarm, LLC, a Nevada limited liability company ( MediFarm );

·

MediFarm I, LLC, a Nevada limited liability company ( MediFarm I );

·

MediFarm II, LLC, a Nevada limited liability company ( MediFarm II ); and

·

MediFarm So Cal, Inc., a California corporation ( MediFarm SoCal )

·

121 North Fourth Street, LLC, a Nevada limited liability company ("121 North Fourth")

·

OneQor Technologies, Inc., a Delaware corporation ("OneQor")

 

Our corporate headquarters is located at 2040 Main Street, Suite 225, Irvine, California 92614 and our telephone number is (888) 909-5564. Our website addresses are as follows: www.terratechcorp.com, www.letsblum.com, and www.ivxx.com. No information available on or through our websites shall be deemed to be incorporated into this Annual Report on Form 10-K. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc.’s OTCQX tier under the symbol “TRTC.”  Our Annual Reports on Form 10-K,  Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a), 14, and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) may be accessed through the SEC’s Interactive Data Electronic Applications system at https://www.sec.gov.

 

Recent Developments

  

In mid-December Terra Tech experienced a significant change that began with the addition of three new Directors to the Company’s Board. This was the first step in a process that saw the addition of a new CEO and COO, the recapitalization of the company, the exiting of the founders of the company after ten years at the helm, and the retirement of our Preferred Stock. In December, Nicholas Kovacevich, Francis Knuettel II, and Ira Ritter joined the Board of Directors. Shortly thereafter Francis Knuettel II and Uri Kenig joined the Company as our Interim CEO and COO, respectively. The recapitalization provided the Company with working capital and a runway to expected cash inflows from asset sales and other investments, which are anticipated to make a significant impact on our balance sheet.

  

Pending Asset Sales

 

Wholly-owned subsidiaries of Terra Tech Corp entered into asset purchase agreements with non-affiliated third parties to sell the assets related to the Company’s Nevada dispensaries. These three transactions are pending, due to the fact that they are subject to approval by the Nevada Department of Taxation as well as local approval. After a year and a half delay, the transactions have been approved by the State of Nevada. We are now awaiting local government approval which has been impacted by COVID-19.The transactions are expected to close promptly following receipt of such approval.

 

·

May 8, 2019 agreement – 1130 East Desert Inn Road, Las Vegas, NV dispensary – to Picksy LLC

·

August 19, 2019 agreement – 1085 S. Virginia St Suite A, Reno, NV dispensary – to Picksy LLC

·

April 15, 2020 agreement – 3650 S. Decatur Blvd, Las Vegas, NV dispensary – to Natural Medicine, LLC.

  

 
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Table of Contents

 

The risks and uncertainties regarding the future of our business due to the impact of COVID-19 and regulatory uncertainty, combined with our historical lack of profitability, have in the past raised substantial doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. Our management feels that proceeds due from its Hydrofarm investment, proceeds due from the Nevada asset sales, management’s past and on-going efforts to trim costs and management’s recent efforts to boost sales will lead to cash sustainability. Therefore management feels that there is no material uncertainty as to the Company’s ability to continue as a going concern.

 

Our Business

 

We are a retail, production and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. We have a presence in two states (California and Nevada) . All of our cannabis dispensaries operate under the name Blüm. Our cannabis dispensaries in California operate as Blüm Oakland in Oakland and Blüm San Leandro in San Leandro and offer a broad selection of medical and adult-use cannabis products including flowers, concentrates and edibles.

 

Business Update Regarding COVID-19

 

The COVID-19 outbreak has presented a substantial public health and economic challenge around the world and is affecting employers, employees, communities and business operations, as well as the world’s economy and financial markets. The full extent to which the COVID-19 outbreak will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

 

To date, we have been able to continue our operations and do not anticipate any material interruptions in the foreseeable future. However, we are continuing to assess the potential impact of the COVID-19 pandemic and its impact on our industry and our company.

 

Marijuana Industry Overview

 

Marijuana cultivation refers to the planting, tending, improving and harvesting of the flowering plant Cannabis, primarily for the production and consumption of cannabis flowers, often referred to as “buds.” The cultivation techniques for marijuana cultivation differ for other purposes such as hemp production and generally references to marijuana cultivation and production do not include hemp.

 

Cannabis belongs to the genus Cannabis in the family Cannabaceae and for the purposes of production and consumption, includes three species, C. sativa (“Sativa”), C. indica (“Indica”), and C. ruderalis (“Ruderalis”). Sativa and Indica generally grow tall with some varieties reaching approximately four meters. The females produce flowers rich in tetrahydrocannabinol (“THC”). Ruderalis is a short plant and produces trace amounts of THC but is very rich in cannabidiol (“CBD”) and which is an antagonist (inhibits the physiological action) to THC.

 

As of December 2020, there are a total of 37 states, plus the District of Columbia, that have passed legislation as it relates to medicinal cannabis. Of these states, 15 have decriminalized adult use cannabis legislation. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for abuse, has no currently-accepted use for medical treatment in the U.S., and lacks acceptable safety for use under medical supervision.

 

These 37 states, and the District of Columbia, have adopted laws that exempt patients who use medicinal cannabis under a physician’s supervision from state criminal penalties. These are collectively referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.

 

 
5

Table of Contents

 

The states that have legalized medicinal cannabis are as follows (in alphabetical order):

 

1.

Alaska

13.

Maryland

25.

North Dakota

2.

Arizona

14.

Massachusetts

26.

Ohio

3.

Arkansas

15.

Michigan

27.

Oklahoma

4.

California

16.

Minnesota

28.

Oregon

5.

Colorado

17.

Mississippi

29.

Pennsylvania

6.

Connecticut

18.

Missouri

30.

Rhode Island

7.

Delaware

19.

Montana

31.

South Dakota

8.

Florida

20.

Nevada

32.

Texas

9.

Hawaii

21.

New Hampshire

33.

Utah

10.

Illinois

22.

New Jersey

34.

Vermont

11.

Louisiana

23.

New Mexico

35.

Virginia

12.

Maine

24.

New York

36.

Washington
     

37.

West Virginia

 

Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts. Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.

 

The dichotomy between federal and state laws has limited the access to banking and other financial services by marijuana businesses. The U.S. Department of Justice and the U.S. Department of Treasury have issued guidance for banks considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue that is generated exclusively from legal sales. However, as banks can still face prosecution if they provide financial services to marijuana businesses, there is widespread refusal of the banking industry to offer banking services to marijuana businesses operating within state and local laws.

 

In November 2016, California and Nevada voters both approved marijuana use for adults over the age of 21 without a physician’s prescription or recommendation, and permitted the cultivation and sale of marijuana, in each case subject to certain limitations. We have obtained the necessary permits and licenses to expand our existing business to cultivate and distribute marijuana in compliance with the laws in the State of Nevada and California. Despite the changes in state laws, marijuana remains illegal under federal law.

 

In November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. On January 1, 2018, the California Bureau of Marijuana Control enacted regulations to implement the AUMA.

 

Nevada voters approved Question 2 in a ballot initiative in November 2016. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one-eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. On June 30, 2017, the State of Nevada Department of Taxation approved our Dual-Use Marijuana business licenses. This approval allowed all of our Blüm cannabis dispensaries in Nevada to commence sales of cannabis for adult-use beginning on July 1, 2017.

 

The U.S. Department of Justice (the “DOJ”) has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.

 

 
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Table of Contents

 

Since the start of the new Congress, there have been positive discussions about the Federal Government’s approach to cannabis. The new Biden administration has signaled a more pro-cannabis approach than the previous administration, however we’ve yet to see any definitive changes. It is possible that certain changes to existing laws or policies could have a negative effect on our business and results of operations.

 

Although the possession, cultivation and distribution of marijuana for medical and adult use is permitted in California and Nevada, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we operate our business in compliance with applicable Nevada and California laws and regulations. Any changes in federal, state or local law enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.

 

Our Medical Marijuana Dispensaries, Cultivation and Manufacturing

 

Black Oak Gallery / Blüm Oakland / Hegenberger

 

On April 1, 2016, we acquired Black Oak, which operates a medical and adult use marijuana dispensary in Oakland, California under the name Blüm. Black Oak opened its retail storefront in Oakland, California in November 2012.

 

Black Oak sells a combination of our own cultivated products as well as high quality name-brand products from outside suppliers. In addition to multiple grades of medical and adult use marijuana, Black Oak sells “edibles”, which include cannabis-infused baked goods, chocolates, and candies; cannabis-infused topical products, such as lotions, massage oils and balms; clones of marijuana plants; and numerous kinds of cannabis concentrates, such as hash, shatter and wax.

 

Black Oak’s target markets are those individuals located in the areas surrounding its dispensary. Black Oak services approximately 250 consumers per day. Collectively known as the Blüm Campus, Black Oak’s location consists of a retail dispensary storefront, indoor cultivation area, a distribution area and a 20-car capacity parking lot.

 

During January 2017, we executed a lease for 13,000 square feet of industrial space on over 30,000 square feet of land in Oakland’s industrial corridor with the intention of building a cultivation facility, which we refer to as “the Hegenberger facility”. The Hegenberger facility is expected to be completed in the 3rd Quarter of 2021 and we will begin cultivating marijuana once all required operating permits are approved.

 

Blüm San Leandro

 

We incorporated Blüm San Leandro on October 14, 2016. Blüm San Leandro has received the necessary governmental approvals and permitting to operate a medical and adult use marijuana dispensary and distribution facility in San Leandro, California. The San Leandro dispensary opened on January 11, 2019. The distribution facility is expected to be completed in mid-2021.

 

IVXX and IVXX Branded Products

 

On September 16, 2014, Terra Tech formed IVXX for the purposes of producing a line of IVXX branded cannabis flowers as well as a complete line of IVXX branded pure cannabis concentrates including: oils, waxes, shatters, and clears.

 

The science of cannabis concentrate extraction functions on the solubility of the cannabinoids and other active ingredients in the cannabis plant. Cannabinoids are not water soluble, so to extract them properly, the cannabinoids must be dissolved in a solvent. IVXX utilizes multiple proprietary extraction methods to produce its concentrates. The Company’s extractors process raw cannabis plants and separate the chemical cannabinoids from the cannabis plant material, producing a concentrate.

 

 
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IVXX produces, markets and sells their line of IVXX branded cannabis products both to adult use and recreational cannabis markets in California and Nevada pursuant to Proposition 64 and Question 2, respectively, which made marijuana consumption legal (January 1, 2018 for California and July 1, 2017 for Nevada), with certain restrictions and rules, for adults over the age of 21.

 

On October 26, 2017, the Company entered into joint venture agreements with NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (collectively “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements were subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. Under the terms of the agreements, the Company remitted to NuLeaf an upfront investment of $4.50 million in the form of convertible loans bearing an interest rate of 6.0% per annum. The Company received all required permits and licenses from the State of Nevada and local authorities in 2018. As a result, the notes receivable balance was converted into a 50.0% ownership interest in Nuleaf. See Note 4— “Variable Interest Entity Arrangements”.

 

Carnegie

  

On October 31, 2017, we formed Carnegie, a wholly owned subsidiary. Carnegie is a real estate holding company that owns the real property and a building located in Santa Ana, California. The Carnegie real estate was listed for sale in the fourth quarter of 2018. On July 30, 2020, we completed sold the real property and building located at 1815 Carnegie Avenue in Santa Ana, California to an unrelated third party. See Note 19 – “Discontinued Operations”.

 

Dyer

 

On October 31, 2017, we formed Dyer, a wholly owned subsidiary. Dyer is a real estate holding company for the purpose of acquiring real property and a building located in Santa Ana, California, where the Company plans to open an additional cannabis operation in Santa Ana, California.

 

Our Operations

 

We are organized into one reportable segment:

 

 

Cannabis Dispensary, Cultivation and Production– Includes cannabis-focused retail, cultivation and production operations; and

 

Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries, cultivation and production facilities in California and Nevada. All of our retail dispensaries in California offer a broad selection of medical and adult use cannabis products including flowers, concentrates and edibles. In Nevada, we also produce and sell a line of medical and adult use cannabis flowers, as well as a line of medical and adult use cannabis-extracted products, which include concentrates, cartridges, vape pens and wax products.

 

Human Capital

 

As of December 31, 2020, we had 52 employees. Our employees are the heart of our Company. In a rapidly evolving industry, it is imperative that we attract, develop and retain top talent on an ongoing basis. To do this, we seek to make Terra Tech an inclusive, diverse and safe workplace, with meaningful compensation and opportunities for career growth.

 

 
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ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before deciding to purchase, hold, or sell our common stock, you should carefully consider the risks described below in addition to the cautionary statements and risks described elsewhere and the other information contained in this Report and in our other filings with the SEC, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these known or unknown risks or uncertainties actually occur, our business, financial condition, results of operations and/or liquidity could be seriously harmed, which could cause our actual results to vary materially from recent results or from our anticipated future results. In addition, the trading price of our common stock could decline due to any of these known or unknown risks or uncertainties, and you could lose all or part of your investment. An investment in our securities is speculative and involves a high degree of risk. You should not invest in our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford to lose your entire investment. See also “Cautionary Note Concerning Forward-Looking Statements.”

 

Summary of Risk Factors

 

Our business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among others, the following key risks:

 

Risks Relating to Our Business, Financial Position and Industry

 

Our business may be adversely affected by the ongoing coronavirus pandemic.

 

We have had significant changes to our operations, which may make it difficult for investors to predict future performance based on current operations.

 

We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.

 

We will likely need additional capital to sustain our operations and will likely need to seek further financing, which we may not be able to obtain on acceptable terms, or at all. If we fail to raise additional capital, as needed, our ability to implement our business model and strategy could be compromised.

 

We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.

 

If we fail to protect our intellectual property, our business could be adversely affected.

 

Although we believe that our products and processes do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.

 

Our trade secrets may be difficult to protect.

 

Our business, financial condition, results of operations, and cash flow may in the future be negatively impacted by challenging global economic conditions.

 

Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

We may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which would impair our results of operations.

 

If we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.

 

We are dependent on the popularity of consumer acceptance of our product lines, including IVXX.

 

A drop in the retail price of medical and adult use marijuana products may negatively impact our business.

 

Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our revenues and profits.

 

We could be found to be violating laws related to cannabis.

 

Variations in state and local regulation, and enforcement in states that have legalized cannabis, may restrict cannabis-related activities, which may negatively impact our revenues and prospective profits.

 

Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.

 

Marijuana remains illegal under federal law.

 

We are not able to deduct some of our business expenses.

 

We may not be able to attract or retain a majority of independent directors.

 

We may not be able to successfully execute on our merger and acquisition strategy.

 

 
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Laws and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect our cultivation, production and dispensary operations, and the business of IVXX.

 

We may not obtain the necessary permits and authorizations to operate the medical and adult use marijuana business.

 

If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.

 

Litigation may adversely affect our business, financial condition, and results of operations.

 

Our insurance coverage may be inadequate to cover all significant risk exposures.

 

We may become subject to legal proceedings and liability if our products are contaminated.

 

Some of our lines of business rely on our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.

 

Disruptions to cultivation, manufacturing and distribution of cannabis in California and Nevada may negatively affect our access to products for sale at our dispensaries.

 

High tax rates on cannabis and compliance costs in California and Nevada may limit our customer base.

 

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

 

Inadequate funding for the Department of Justice (DOJ) and other government agencies could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

California’s Phase-In of Laboratory Testing Requirements could impact the availability of the products sold in our dispensary.

 

There is uncertainty related to the regulation of vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.

 

The scientific community has not yet extensively studied the long-term health effects of the use of vaporizer products.

 

If product liability lawsuits are brought against us, we will incur substantial liabilities.

 

We may not be able to realize gains from our investment in Hydrofarm.

 

Unionization of employees could have a material adverse impact on our business.

 

Inadequate funding for state and local regulatory agencies and the effects of COVID-19 could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

Competition from Synthetic Production and Technological Advances

 

Risks inherent in an Agricultural Business.

 

Unfavorable Publicity or Consumer Perception.

 

Risks Related to an Investment in Our Securities

 

 

We expect to experience volatility in the price of our Common Stock, which could negatively affect stockholders’ investments.

 

Our Common Stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.

 

Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.

 

The elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.

 

We may issue additional shares of Common Stock or Preferred Stock in the future, which could cause significant dilution to all stockholders.

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of us.

 

Because we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them.

 

Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact profitability.

 

 
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Risks Relating to Our Business, Financial Position and Industry

 

Our business may be adversely affected by the ongoing coronavirus pandemic.

 

In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. This virus continues to spread globally and efforts to contain the spread of COVID-19 have intensified. The outbreak and any preventative or protective actions that governments or we may take in respect of COVID-19 may result in a period of business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. There may be interruptions to our supply chain due to the inability of manufacturers to continue normal business operations and to ship products. In addition, a significant outbreak of COVID-19 or other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, resulting in an economic downturn that could impact our business, financial condition and results of operations. We are currently working to enhance our business continuity plans to include measures to protect our employees in the event of infection in our corporate offices, or in response to potential mandatory quarantines.

 

We have had significant changes to our operations, which may make it difficult for investors to predict future performance based on current operations.

 

We have had significant changes to our operations which changes the relevance of our historical performance upon which investors may base an evaluation of our potential future performance. In particular, we have not proven that we can sell cannabis products in a manner that enables us to be profitable and meet customer requirements, obtain the necessary permits and/or achieve certain milestones to develop our dispensary businesses, enhance our line of cannabis products, including IVXX, develop and maintain relationships with key manufacturers and strategic partners to extract value from our intellectual property, raise sufficient capital in the public and/or private markets, or respond effectively to competitive pressures. As a result, there can be no assurance that we will be able to develop or maintain consistent revenue sources, or that our operations will be profitable and/or generate positive cash flow.

 

Any forecasts we make about our operations may prove to be inaccurate. We must, among other things, determine appropriate risks, rewards, and level of investment in our product lines, respond to economic and market variables outside of our control, respond to competitive developments and continue to attract, retain, and motivate qualified employees. There can be no assurance that we will be successful in meeting these challenges and addressing such risks and the failure to do so could have a materially adverse effect on our business, results of operations, and financial condition. Our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks, challenges, and uncertainties, the value of your investment could be significantly reduced or completely lost.

 

We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.

 

We have incurred significant losses in prior periods. For the year ended December 31, 2020, we incurred a net loss of $30.12 million and, as of that date, we had an accumulated deficit of $219.80 million. For the year ended December 31, 2019, we incurred a net loss of $46.93 million and, as of that date, we had an accumulated deficit of $189.67 million. Any losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flow.

 

 
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We will likely need additional capital to sustain our operations and will likely need to seek further financing, which we may not be able to obtain on acceptable terms, or at all. If we fail to raise additional capital, as needed, our ability to implement our business model and strategy could be compromised.

 

We have limited capital resources and operations. To date, our operations have been funded primarily from the proceeds of debt and equity financings. We expect to require substantial capital in the near future to commence operations at additional cultivation and production facilities, expand our product lines, develop our intellectual property base, and establish our targeted levels of commercial production. We may not be able to obtain additional financing on terms acceptable to us, or at all. In particular, because marijuana is illegal under federal law, we may have difficulty attracting investors.

 

Even if we obtain financing for our near-term operations, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous factors including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot provide assurance that we will be able to obtain capital in the future to meet our needs.

 

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing stockholders will be reduced and our stockholders may experience significant dilution. In addition, new securities may contain rights, preferences, or privileges that are senior to those of our Common Stock. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price of our shares of Common Stock could limit our ability to obtain equity financing.

 

We cannot provide any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.

 

We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.

 

The industries in which we operate in general are subject to intense and increasing competition. Some of our competitors may have greater capital resources, facilities, and diversity of product lines, which may enable them to compete more effectively in this market. Our competitors may devote their resources to developing and marketing products that will directly compete with our product lines. Due to this competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products. There are no assurances that competition in our respective industries will not lead to reduced prices for our products. If we are unable to successfully compete with existing companies and new entrants to the market this will have a negative impact on our business and financial condition.

 

If we fail to protect our intellectual property, our business could be adversely affected.

 

Our viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our intellectual property to distinguish our products from our competitors’ products. We rely on copyrights, trademarks, trade secrets, and confidentiality provisions to establish and protect our intellectual property. We may not be able to enforce some of our intellectual property rights because cannabis is illegal under federal law.

 

Any infringement or misappropriation of our intellectual property could damage its value and limit our ability to compete. We may have to engage in litigation to protect the rights to our intellectual property, which could result in significant litigation costs and require a significant amount of our time. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by us.

 

Competitors may also harm our sales by designing products that mirror our products or processes that do not infringe on our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.

 

 
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We may also find it necessary to bring infringement or other actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no assurance that we will have the financial or other resources to enforce our rights or be able to enforce our rights or prevent other parties from developing similar products or processes or designing around our intellectual property.

 

Although we believe that our products and processes do not and will not infringe or violate the intellectual property rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.

 

We are not aware of any infringement by us of any person’s or entity’s intellectual property rights. In the event that products we sell or processes we employ are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products or processes or obtain a license for the manufacture and/or sale of such products or processes or cease selling such products or employing such processes. In such event, we may not be able to modify our products or secure a license in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business.

 

We may not have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If our products or processes are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and our financial condition.

 

Our trade secrets may be difficult to protect.

 

Our success depends upon the skills, knowledge, and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. Because we operate in several highly competitive industries, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties, confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements to perfect our rights.

 

These confidentiality, inventions, and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets could also be independently discovered by competitors, in which case we would not be able to prevent the use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.

 

Our business, financial condition, results of operations, and cash flow may in the future be negatively impacted by challenging global economic conditions.

 

Future disruptions and volatility in global financial markets and declining consumer and business confidence could lead to decreased levels of consumer spending. These macroeconomic developments could negatively impact our business, which depends on the general economic environment and levels of consumer spending. As a result, we may not be able to maintain our existing customers or attract new customers, or we may be forced to reduce the price of our products. We are unable to predict the likelihood of the occurrence, duration, or severity of such disruptions in the credit and financial markets and adverse global economic conditions. Any general or market-specific economic downturn could have a material adverse effect on our business, financial condition, results of operations, and cash flow.

 

 
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Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

Our future success largely depends upon the continued services of our executive officers and management team. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment in our stock.

 

Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. We face significant competition for skilled personnel in our industries. In particular, if the marijuana industry continues to grow, demand for personnel may become more competitive. This competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a result, the value of your investment could be significantly reduced or completely lost.

 

We may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which would impair our results of operations.

 

In the near term, we intend to expand the scope of our operations activities significantly. If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, finances, management, and other resources. The factors that may place strain on our resources include, but are not limited to, the following:

 

 

The need for continued development of our financial and information management systems;

 

The need to manage strategic relationships and agreements with manufacturers, customers, and partners; and

 

Difficulties in hiring and retaining skilled management, technical, and other personnel necessary to support and manage our business.

 

Additionally, our strategy envisions a period of rapid growth that may impose a significant burden on our administrative and operational resources. Our ability to effectively manage growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that we will be successful in recruiting and retaining new employees or retaining existing employees.

 

Our management may not be able to manage this growth effectively. Our failure to successfully manage growth could result in our sales not increasing commensurately with capital investments or otherwise materially adversely affecting our business, financial condition, or results of operations.

 

If we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.

 

In the area of innovation, we must be able to develop new technologies and products that appeal to our customers. This depends, in part, on the technological and creative skills of our personnel and on our ability to protect our intellectual property rights. We may not be successful in the development, introduction, marketing, and sourcing of new technologies or innovations, that satisfy customer needs, achieve market acceptance, or generate satisfactory financial returns.

 

 
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We depend on the popularity of consumer acceptance of our product lines, including IVXX.

 

Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance and demand of our product lines, including IVXX. Acceptance of our products will depend on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety, and reliability. If customers do not accept our products, or if we fail to meet customers’ needs and expectations adequately, our ability to continue generating revenues could be reduced.

 

A drop in the retail price of medical and adult use marijuana products may negatively impact our business.

 

The demand for our products depends in part on the price of commercially grown marijuana. Fluctuations in economic and market conditions that impact the prices of commercially grown marijuana, such as increases in the supply of such marijuana and the decrease in the price of products using commercially grown marijuana, could cause the demand for medical marijuana products to decline, which would have a negative impact on our business.

 

Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our revenues and profits.

 

Currently, there are 37 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical and adult uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be producing, cultivating, or dispensing marijuana in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may therefore indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain.

 

Since the start of the new congress, there have been “positive” discussions about the Federal Government’s approach to cannabis. The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. With the change of the Attorney General, the DOJ has not signaled any change in their enforcement efforts. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical marijuana.

 

We could be found to be violating laws related to cannabis.

 

Currently, there are 37 states plus the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. Because we cultivate, produce, sell and distribute medical marijuana, we have risk that we will be deemed to facilitate the selling or distribution of medical marijuana in violation of federal law. Finally, we could be found in violation of the CSA in connection with the sale of IVXX’s products. This would cause a direct and adverse effect on our subsidiaries’ businesses, or intended businesses, and on our revenue and prospective profits.

 

 
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Variations in state and local regulation, and enforcement in states that have legalized cannabis, may restrict cannabis-related activities, which may negatively impact our revenues and prospective profits.

 

Individual state and local laws do not always conform to the federal standard or to other states’ laws. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. As of December 2020, 15 states and the District of Columbia have legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized, or created medical marijuana exemptions. For example, certain states have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly and adversely affect our business and our revenue and profits.

 

In November 2016, California voters approved Proposition 64, also known as the Adult Use of Marijuana Act (“AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. On January 1, 2018 the California Bureau of Cannabis Control enacted regulations to implement the AUMA.

 

Also, in November 2016, Nevada voters approved Question 2 in a ballot initiative. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one-eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. The Nevada Department of Taxation enacted regulations to implement Question 2 in the summer of 2017.

 

If we are unable to obtain and maintain the permits and licenses required to operate our business in compliance with state and local regulations in California, we may experience negative effects on our business and results of operations.

 

Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational marijuana.

 

Our website is visible in jurisdictions where medicinal and adult use of marijuana is not permitted and, as a result, we may be found to be violating the laws of those jurisdictions.

 

Marijuana remains illegal under federal law.

 

Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because marijuana is still federally illegal.

  

We are not able to deduct some of our business expenses.

 

Section 280E of the Internal Revenue Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing us to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of nondeductible expenses is to its total revenues. Therefore, our marijuana business may be less profitable than it could otherwise be.

 

 
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We may not be able to attract or retain a majority of independent directors.

 

Our board of directors is currently comprised of a majority of independent directors. However, through much of our history our board was not comprised of a majority of independent directors. We may in the future desire to list our common stock on The New York Stock Exchange (“NYSE”) or The NASDAQ Stock Market (“NASDAQ”), both of which require that a majority of our board be comprised of independent directors. We may have difficulty attracting and retaining independent directors because, among other things, we operate in the marijuana industry, and as a result we may be delayed or prevented from listing our common stock on the NYSE or NASDAQ.

 

We may not be able to successfully execute on our merger and acquisition strategy.

 

Our business plan depends in part on merging with or acquiring other businesses in the marijuana industry. The success of any acquisition will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any acquisition may result in diversion of management’s attention from other business concerns, and such acquisition may be dilutive to our financial results and/or result in impairment charges and write-offs. We might also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction.

 

Although we expect to realize strategic, operational and financial benefits as a result of our acquisitions, we cannot predict whether and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into our business.

 

Any future acquisition could involve other risks, including the assumption of unidentified liabilities for which we, as a successor owner, may be responsible. These transactions typically involve a number of risks and present financial and other challenges, including the existence of unknown disputes, liabilities, or contingencies and changes in the industry, location, or regulatory or political environment in which these investments are located, that our due diligence review may not adequately uncover and that may arise after entering into such arrangements.

 

Laws and regulations affecting the medical and adult use marijuana industry are constantly changing, which could detrimentally affect our cultivation, production and dispensary operations, and the business of IVXX.

 

Local, state, and federal medical and adult use marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of our cultivation, production and dispensary businesses, and our business of selling cannabis products through IVXX. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

 

We may not obtain the necessary permits and authorizations to operate the medical and adult use marijuana business.

 

We may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations for our cultivation, production and dispensary businesses, or may only be able to do so at great cost. In addition, we may not be able to comply fully with the wide variety of laws and regulations applicable to the medical and adult use marijuana industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the medical and adult use marijuana business, which could have a material adverse effect on our business.

 

 
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If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.

 

Our participation in the medical and adult use marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against us. Litigation, complaints, and enforcement actions could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects. We have not been, and are not currently, subject to any material litigation, complaint, or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority. IVXX is presently engaged in the distribution of marijuana; however, we have not been, and are not currently, subject to any material litigation, complaint or enforcement action regarding marijuana (or otherwise) brought by any federal, state, or local governmental authority with respect to IVXX’s business.

 

We may have difficulty accessing the service of banks, which may make it difficult for us to operate.

 

Since the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open or maintain bank accounts may make it difficult for us to operate our medical and adult use marijuana businesses. If any of our bank accounts are closed, we may have difficulty processing transactions in the ordinary course of business, including paying suppliers, employees and landlords, which could have a significant negative effect on our operations.

  

Litigation may adversely affect our business, financial condition, and results of operations.

 

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.

 

Our insurance coverage may not cover all significant risk exposures.

 

We will be exposed to liabilities that are unique to the products we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. In particular, we have had difficulty obtaining insurance because we operate in the marijuana industry. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, and results of operations. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

 

We may become subject to legal proceedings and liability if our products are contaminated.

 

We source some of our products from third-party suppliers. Although we verify that the products we receive from third-party suppliers are adequately tested, we may not identify all contamination in those products. Possible contaminates include pesticides, molds and fungus. If any of our products harm a customer, they may sue us in addition to the supplier, and we may not have adequate insurance to cover any such claims, which could result in a negative effect on our results of operations.

 

Some of our lines of business rely on our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.

 

Some of our lines of business and services, including our dispensaries, rely on services hosted and controlled directly by third-party service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or software services is negatively affected, or if one of our service providers were to terminate its agreement with us, we might not be able to deliver access to our data, which could subject us to reputational harm and cause us to lose customers and future business, thereby reducing our revenue.

 

 
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We hold large amounts of customer data, some of which is hosted in third-party facilities. A security incident at those facilities or ours may compromise the confidentiality, integrity or availability of customer data. Unauthorized access to customer data stored on our computers or networks may be obtained through break-ins, breaches of our secure network by an unauthorized party, employee theft or misuse or other misconduct. It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers. Accounts created with weak passwords could allow cyber-attackers to gain access to customer data. If there were an inadvertent disclosure of customer information, or if a third party were to gain unauthorized access to the information we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure of the information we collect or breach of our security could damage our reputation, result in the loss of customers and harm our business.

 

Because of the large amount of data we collect and manage using our hosted solutions, it is possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant or cause us to fail to meet committed service levels. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems or security breaches. In addition, computer viruses or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports in near real time because of a number of factors, including failures of our network or software. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers, or we could be found liable for damages or incur other losses.

 

Loss of access to our data could have a negative impact on our business and results of operations. In particular, the states in which we operate require that we maintain certain information about our customers and transactions. If we fail to maintain such information, we could be in violation of state laws.

 

Disruptions to cultivation, manufacturing and distribution of cannabis in California and Nevada may negatively affect our access to products for sale at our dispensaries.

 

California and Nevada laws and regulations require us to purchase products only from licensed vendors and through licensed distributors. To date, a relatively small number of licenses have been issued in California to cultivate, manufacture and distribute cannabis products. We have obtained a license to distribute products from our cultivation and manufacturing facilities to our dispensaries, however we currently do not cultivate and manufacture enough of our own products to satisfy customer demand. In addition, we carry products cultivated and manufactured by third parties. As a result, if an insufficient number of cultivators, manufacturers and distributors are able to obtain licenses our ability to purchase products and have them delivered to our dispensaries may be limited and may impact our sales.

 

High tax rates on cannabis and compliance costs in California and Nevada may limit our customer base.

 

The State of California imposes a 15.0% excise tax and state of Nevada imposes a 10% excise tax on products sold at licensed cannabis dispensaries. Local jurisdictions typically impose additional taxes on cannabis products. In addition, we incur significant costs complying with state and local laws and regulations. As a result, products sold at our dispensaries will likely cost more than similar products sold by unlicensed vendors and we may lose market share to those vendors.

 

Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

 

The Tax Cuts and Jobs Act, or the Tax Act, was enacted on December 22, 2017, and contains many changes to U.S. federal tax laws. The Tax Act requires complex computations that were not previously provided for under U.S. tax law and significantly revised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. At December 31, 2020, the Company has completed its accounting for the tax effects of the 2017 Tax Act. However, additional guidance may be issued by the Internal Revenue Service (the”IRS”), the Department of the Treasury, or other governing body that may significantly differ from our interpretation of the law, which may result in a material adverse effect on our business, cash flow, results of operations or financial conditions.

 

 
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Inadequate funding for the DOJ and other government agencies could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

In an effort to provide guidance to federal law enforcement, the DOJ has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the CSA but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.

 

The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical marijuana. If a prolonged government shutdown occurs, it could enable the DOJ to enforce the CSA in states that have laws legalizing medical marijuana.

  

California’s Phase-In of Laboratory Testing Requirements could impact the availability of the products sold in our dispensary.

 

Beginning July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. A licensee can only sell cannabis goods that have been tested by a licensed testing laboratory and have passed all statutory and regulatory testing requirements. In order to be sold, cannabis goods harvested or manufactured prior to January 1, 2018, must be tested by a licensed testing laboratory and must comply with all testing requirements in section 5715 of the Bureau of Cannabis Control (“BCC”) regulations. Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining to destruction.

 

There is uncertainty related to the regulation of vaporization products and certain other consumption accessories. Increased regulatory compliance burdens could have a material adverse impact on our business development efforts and our operations.

 

There is uncertainty regarding whether and in what circumstances federal, state, or local regulatory authorities will seek to develop and enforce regulations relative to vaporizer hardware and accessories that can be used to vaporize cannabis and/or tobacco. Further, it remains to be seen whether current or future regulations relating to tobacco vaporization products would also apply to cannabis vaporization products and related consumption accessories.

 

There has been increasing activity on the federal, state, and local levels with respect to scrutiny of vaporizer products. Federal, state, and local governmental bodies across the United States have indicated that vaporization products and certain other consumption accessories may become subject to new laws and regulations at the state and local levels. For example, in September 2019, the Trump Administration announced a plan to ban the sale of most flavored e-cigarettes nationwide. At the state level, over 25 states have implemented statewide regulations that prohibit vaping in public places. In January 2015, the California Department of Health declared electronic cigarettes and certain other vaporizer products a health threat that should be strictly regulated like tobacco products, and in September 2019, California’s governor issued an executive order on vaping, focused on enforcement and disclosure. Many states, provinces, and some cities have passed laws restricting the sale of electronic cigarettes and certain other tobacco vaporizer products. Some cities have also implemented more restrictive measures than their state counterparts, such as San Francisco, which in June 2018, approved a new ban on the sale of flavored tobacco products, including vaping liquids and menthol cigarettes. In August 2020, California prohibited the sale of most flavored tobacco products, including menthol cigarettes.

 

 
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The application of any new laws or regulations that may be adopted in the future, at a federal, state, or local level, directly or indirectly implicating cannabis vaporization products or consumption accessories could limit our ability to sell such products, result in additional compliance expenses, and require us to change our labeling and methods of distribution, any of which could have a material adverse effect on our business, results of operations and financial condition.

 

The scientific community has not yet extensively studied the long-term health effects of the use of vaporizer products.

 

Cannabis vaporizers and related products were recently developed and therefore the scientific community has not had a sufficient period of time to study the long-term health effects of their use. If the scientific community were to determine conclusively that use of any or all of these products poses long-term health risks, market demand for these products and their use could materially decline. Such a determination could also lead to litigation and significant regulation. Loss of demand for our product, product liability claims, and increased regulation stemming from unfavorable scientific studies on these products could have a material adverse effect on our business, results of operations, and financial condition.

 

If product liability lawsuits are brought against us, we will incur substantial liabilities.

 

We face an inherent risk of product liability. For example, we could be sued if any product we sell allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts.

 

Furthermore, vaporizer products and other similar consumption product manufacturers, suppliers, distributors, and sellers have recently become subject to litigation. While we have not been a party to any product liability litigation and do not ourselves manufacture any products, several lawsuits have been brought against other manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. We may be subject to similar claims in the future relating to vaporizer products that we sell. We may also be named as a defendant in product liability litigation against one of our suppliers by association, including in class action lawsuits. In addition, we may see increasing litigation over our vaporizer products or the regulation of our products as the regulatory regimes surrounding these products develop. If such lawsuits are filed against us in the future, we could incur substantial costs, including costs to defend the cases and possible damages awards.

  

If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit sales of our products. Even a successful defense of these hypothetical future cases would require significant financial and management resources. If we are unable to successfully defend these hypothetical future cases, we could face at least the following potential consequences:

 

 

decreased demand for our products;

 

injury to our reputation;

 

costs to defend the related litigation;

 

a diversion of management’s time and our resources;

 

substantial monetary awards to users of our products;

 

product recalls or withdrawals;

 

loss of revenue; and

 

a decline in our stock price.

 

 
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In addition, while we continue to take what we believe are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.

 

We may not be able to realize gains from our investment in Hydrofarm.

 

The Company owns 593,261 shares of common stock of Hydrofarm, a public company trading on the Nasdaq Global Select Market under the ticker symbol “HYFM”, and warrants to acquire an additional 296,630 shares of Hydrofarm common stock at an exercise price of $16.86, both of which are subject to a lock-up until early June 2021. The shares of Hydrofarm common stock and the shares of Hydrofarm common stock underlying the warrants may not appreciate or may decline in value. In addition, there may not be enough liquidity in the market for Hydrofarm common stock for us to sell the number of share we desire to sell when the lock-up expires. As a result, we may not be able to realize gains from our investment in Hydrofarm.

 

Unionization of employees could have a material adverse impact on our business.

 

Employees in our Blum Oakland and Blum San Leandro facilities are unionized. We could face an increased risk of work stoppages and higher labor costs wherever labor is organized. If additional employees at our dispensaries, production or cultivation facilities were to unionize, our relationship with our employees could be adversely affected. Accordingly, unionization of our employees could have a material adverse impact on our operating costs and financial condition and could force us to raise prices on our products or curtail operations.

 

Inadequate funding for state and local regulatory agencies and the effects of COVID-19 could hinder their ability to perform normal business functions on which the operation of our business may rely, which could negatively impact our business.

 

We operate in a highly regulated industry and rely on state and local regulatory agencies to issue licenses to operate our business and, in some cases, approve transfers of ownership interests in the event we intend to dispose of assets. Since the onset of the COVID-19 pandemic, many state and local regulatory agencies have been operating at reduced capacity which has resulted in delayed approvals of transfers of ownership interests. As a result, receiving necessary regulatory approvals for the pending transfers of our three Nevada dispensaries has taken longer than anticipated and any future transfers may also be delayed. To the extent we rely on the proceeds from those transfers to fund our operations, continued delays may negatively impact our business.

 

Competition from Synthetic Production and Technological Advances could adversely impact our profitability.

 

The pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal cannabis, through the development and distribution of synthetic products which emulate the effects and treatment of organic cannabis. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could materially adversely affect the ability of the Company to secure long-term profitability and success through the sustainable and profitable operation of its business.

 

There are Risks Inherent in an Agricultural Business.

 

Medical and adult-use cannabis is an agricultural product. There are risks inherent in the cultivation business, such as insects, plant diseases and similar agricultural risks. Although the products are usually grown indoors or in green houses under climate-controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on the production of the products and, consequentially, on the business, financial condition and operating results of the Company.

 

 
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We may suffer from Unfavorable Publicity or Consumer Perception.

 

The legal cannabis industry in the U.S. is at an early stage of its development. Cannabis has been, and is expected to continue to be, a controlled substance. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis are mixed and evolving. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for cannabis and on the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity, reports or other media attention regarding cannabis in general, or associating the consumption of cannabis with negative effects or events, could have such a material adverse effect.

 

Risks Related to an Investment in Our Securities

 

We expect to experience volatility in the price of our Common Stock, which could negatively affect stockholders’ investments.

 

The trading price of our Common Stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. All of these factors could adversely affect your ability to sell your shares of Common Stock or, if you are able to sell your shares, to sell your shares at a price that you determine to be fair or favorable.

 

Our Common Stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.

 

Our Common Stock is categorized as “penny stock.” The Securities and Exchange Commission has adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our Common Stock is significantly less than $5.00 per share and is therefore considered “penny stock.” This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer buying our securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Stock, either directly or on behalf of their clients, may discourage potential stockholders from purchasing our Common Stock, or may adversely affect the ability of stockholders to sell their shares.

  

Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our shares of Common Stock, have an adverse effect on the market for our shares of Common Stock, and thereby depress our price per share of Common Stock.

 

 
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The elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.

 

Our Articles of Incorporation contain a provision permitting us to eliminate the personal liability of our directors to us and our stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under any future employment agreements with our officers or agreements entered into with our directors. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties; and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.

 

We may issue additional shares of Common Stock or Preferred Stock in the future, which could cause significant dilution to all stockholders.

 

Our Articles of Incorporation authorize the issuance of up to 990,000,000 shares of Common Stock and 50,000,000 shares of preferred stock, with a par value of $0.001 per share. As of March 23, 2020, we had 231,754,219 shares of Common Stock outstanding; however, we may issue additional shares of Common Stock or preferred stock in the future in connection with a financing or an acquisition. Such issuances may not require the approval of our stockholders. In addition, certain of our outstanding rights to purchase additional shares of Common Stock or securities convertible into our Common Stock are subject to full-ratchet anti-dilution protection, which could result in the right to purchase significantly more shares of Common Stock being issued or a reduction in the purchase price for any such shares or both. Any issuance of additional shares of our Common Stock, or equity securities convertible into our Common Stock, including but not limited to, preferred stock, warrants, and options, will dilute the percentage ownership interest of all stockholders, may dilute the book value per share of our Common Stock, and may negatively impact the market price of our Common Stock.

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of us.

 

Nevada has a business combination law that prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.

 

The effect of Nevada’s business combination law is potentially to discourage parties interested in taking control of us from doing so if they cannot obtain the approval of our Board. Both of these provisions could limit the price investors would be willing to pay in the future for shares of our Common Stock.

  

Because we do not intend to pay any cash dividends on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Declaring and paying future dividends, if any, will be determined by our Board, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Articles of Incorporation, contractual restrictions, and such other factors as our Board deems relevant. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.

 

 
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Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact profitability.

 

As of December 31, 2020, we have goodwill of $6.17 million and other intangible assets of $7.71 million, which represents 13.3% of our total assets. As of December 31, 2019, we had goodwill of $21.47 million and other intangible assets of $14.87 million, which represented 30.5% of our total assets. We evaluate goodwill for impairment on an annual basis or more frequently if impairment indicators are present based upon the fair value of each reporting unit. We assess the impairment of other intangible assets on an annual basis, or more frequently if impairment indicators are present, based upon the expected future cash flows of the respective assets. These valuations include management’s estimates of sales, profitability, cash flow generation, capital structure, cost of debt, interest rates, capital expenditures, and other assumptions. Significant negative industry or economic trends, disruptions to our business, inability to achieve sales projections or cost savings, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure, and divestitures may adversely impact the assumptions used in the valuations. If the estimated fair value of our reporting units changes in future periods, we may be required to record an impairment charge related to goodwill or other intangible assets, which would reduce earnings in such period.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

A summary of the offices and properties we lease or own are presented in the table below. Each of our facilities is considered to be in good condition, adequate for its purpose and suitably utilized according to the individual nature and requirements of the relevant operations.

 

Purpose

 

Location

 

Own or

Lease

 

Base

Monthly

Rent

 

 

Lease

Begin

Date

 

Lease

End

Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Corporate Headquarters

 

Irvine, CA

 

Lease

 

$ 19,806

 

 

5/1/2019

 

4/30/2024

 
Cultivation Facility (1)

 

Oakland, CA

 

Lease

 

$ 26,225

 

 

1/1/2017

 

12/31/2024

 
Cultivation Facility (1)(2)

 

Spanish Springs, NV

 

Own

 

 

 

 

 

 

 

 

 
Dispensary (Bl m Oakland)/Cultivation Facility

 

Oakland, CA

 

Lease

 

$ 31,486

 

 

5/1/2016

 

3/31/2022

 
Dispensary (Bl m San Leandro)

 

San Leandro, CA

 

Lease

 

$ 26,225

 

 

1/1/2017

 

12/31/2024

 
Building (Dyer) (1)

 

Santa Ana, CA

 

Own

 

 

 

 

 

 

 

 

 
Building (4th Street) (1)(2)

 

Las Vegas, NV

 

Own

 

 

 

 

 

 

 

 

 

________

(1) Not open yet.
(2) For sale.

 

ITEM 3. LEGAL PROCEEDINGS

 

See Note 21 – “Litigation and Claims”of the Notes to Consolidated Financial Statements in Part II of this Annual Report on Form 10-K, which is incorporated herein by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our Common Stock is quoted on the OTC Markets Group, Inc.’s OTCQX tier under the symbol “TRTC.” On March 23, 2021, the closing bid price on the OTC Markets Group, Inc.’s OTCQX tier for our Common Stock was $0.39.

 

Holders

 

As of March 23, 2021, there were 234,062,627 shares of Common Stock issued and 231,754,219 shares of Common Stock outstanding (excluding shares of Common Stock issuable upon conversion or conversion into shares of Common Stock of all of our warrants and options) held by approximately 209 stockholders of record. We believe that we have more than 296,500 beneficial holders of our Common Stock.

 

Dividends

 

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future. There are no restrictions in our Articles of Incorporation or Bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:

 

 

we would not be able to pay our debts as they become due in the usual course of business; or

 

our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our Articles of Incorporation.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

On January 12, 2016, we adopted the 2016 Equity Incentive Plan (the “Plan”), and our stockholders approved the Plan at our annual meeting of stockholders that was held on September 26, 2016. Pursuant to the terms of the Plan, the maximum number of shares of Common Stock available for the grant of awards under the Plan shall not exceed 2.0 million. During the years ended December 31, 2016, 2017, and 2018, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 0.13 million, 0.21 million, and 0.20 million shares of Common Stock, respectively. The options have exercise prices of $2.54 - $4.68 per share, and generally vest quarterly over a three-year period.

 

On December 11, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive Plan (the “Plan”). On June 20, 2019, the Company adopted the Amended and Restated 2018 Equity Incentive Plan (the “2018 Plan”), and our stockholders approved the Plan at our annual meeting of stockholders that was held September 23, 2019. Pursuant to the terms of the 2018 Plan, the maximum number of shares of Common Stock available for the grant of awards under the 2018 Plan shall not exceed 13.00 million. On February 14, 2020, the Board approved an amendment (the “Plan Amendment”) to the Company’s Amended and Restated 2018 Equity Incentive Plan (the “Plan”) to increase the number of shares available for issuance thereunder by 28.98 million shares of Terra Tech common stock for a total of 43.98 million shares of Terra Tech common stock, plus the number of shares, not to exceed 2.00 million shares, that may become available under the Company’s 2016 Equity Incentive Plan after termination of awards thereunder, subject to adjustment in accordance with the terms of the Plan. During the years ended December 31, 2020, 2019, and 2018, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 12.11 million, 1.89 million, and 2.60 million shares of Common Stock, respectively. The options have exercise prices of $0.07 - $1.00 per share, and generally vest quarterly over a three-year period.

  

During the year ended December 31, 2018, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 0.35 million shares of Common Stock that were not subject to the 2016 Equity Plan or the 2018 Equity Plan. The options have exercise prices of $2.02 per share, and generally vest quarterly over a three-year period.

 

 
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Equity Compensation Plan Information

 

Plan Category

 

Number of

Securities to be

Issued Upon

Exercise of Outstanding

Options,

Warrants and

Rights

 

 

 

Range of

Weighted-

Average

Exercise Price of Outstanding Options,

Warrants and Rights

 

Number of

Securities

Remaining

Available for Future Issuance Under

Equity

Compensation Plans (Excluding

Securities

Reflected in

Column (a))

 

 

 

(a)

 

 

 

(b)

 

(c)

 

 

 

 

 

 

 

 

 

 

 

Equity Compensation Plans Approved By Security Holders

 

 

17,144,932

 

 

$

0.072-5.035

 

 

28,831,493

 

Equity Compensation Plans Not Approved By Security Holders

 

 

347,898

 

 

 

2.02-3.75

 

 

-

 

Total

 

 

17,492,830

 

 

$

0.072-5.035

 

 

28,831,493

 

 

Penny Stock Regulations

 

The SEC has adopted regulations that generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our Common Stock, when and if a trading market develops, may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1.00 million (excluding primary residence), or annual incomes exceeding $0.20 million individually, or $0.30 million, together with their spouse).

 

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of investors to sell their Common Stock in the secondary market.

  

Equity Financing Facility

 

On September 7, 2018, Company filed a shelf registration statement on Form S-3 with the United States Securities and Exchange Commission. The shelf registration was declared effective by the SEC, on October 11, 2018. The registration statement will allow the Company to issue, from time to time at prices and on terms to be determined at or prior to the time of the offering, shares of our common stock, par value $0.001 per share (our “Common Stock”), shares of our preferred stock, par value $0.001 per share (our “Preferred Stock”), debt securities, warrants, rights, or purchase contracts, either individually or in units, with a total value of up to $100.00 million.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable as we are a Small Reporting Company.

 

 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K beginning on page F-1. The following discussion contains forward-looking statements that involve risks and uncertainties. Investors should not place undue reliance on these forward-looking statements. These forward-looking statements are based on current expectations and actual results could differ materially from those discussed herein. Factors that could cause or contribute to the differences are discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those predicted in these forward-looking statements, and the events anticipated in the forward-looking statements may not actually occur. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results or to reflect the occurrence of unanticipated events, unless required by applicable laws or regulations.

 

Results of Operations

 

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

 

Revenues– For the year ended December 31, 2020, we generated revenues from continuing operations of approximately $14.29 million, compared to approximately $16.49 million for the year ended December 31, 2019, a decrease of $2.20 million. The year-over-year decrease was driven by a dispensary revenue decline of $5.98 million which was partially offset by cultivation and manufacturing revenue increases of which totaled $3.78 million. The dispensary revenue was hit by a customer traffic decline from COVID-19 and six combined months of store closures for our two Bay area dispensaries due to civil unrest.

 

Gross Profit and Gross Margin– Our gross profit for the year ended December 31, 2020 was approximately $3.60 million, compared to a gross profit of approximately, $10.35 million for the year ended December 31, 2019, a decrease of $6.75 million. Our gross margin for the year ended December 31, 2020 was approximately 25.2%, compared to approximately 62.8% for the year ended December 31, 2019. Most of the gross profit decrease came about because of less year-over-year dispensary revenue as well as higher cost of sales in our cultivation and production operations.

 

Selling, General and Administrative Expenses– Selling, general and administrative expenses for the year ended December 31, 2020 were approximately $24.60 million, compared to approximately $36.68 million for the year ended December 31, 2019, a decrease of $12.08 million. In general the decrease was due to costs driven out of the company as we narrowed our focus onto a few key assets. The following areas were examples of this:(i) a $3.162 million decrease in salaries / payroll taxes, (ii) a $2.47 million decrease in option expense, (iii) a $1.57 million decrease in allowance for doubtful accounts, (iv) a $1.49 million decrease in advertising & promotion expense, (v) a $0.53 million decrease in insurance expense, (vi) a $0.49 million decrease in legal fees, (vii) a $0.47 million decrease in amortization expense, (viii) a $0.45 million decrease in accounting fees, and (ix) a $0.44 million decrease in consulting and other professional fees.

 

Other Operating Gain/Expense – Other operating expenses for the year ended December 31, 2020 were approximately $19.88 million, compared to Other expenses of $8.58 million in the year ended December 31, 2019, an increase in $11.30 million.The 2020 activity was driven by goodwill impairment charges of $19.91 million.

 

Other Income / (Expense) – Other income for the year ended December 31, 2020 was approximately $27.08 million, compared to other expense of $9.24 million for the year ended December 31, 2019, an increase of $36.32 million. The year-over-year improvement was due to (i) 2020 income driven by the mark-to-market of the company’s investment in Hydrofarm Holdings, a $29.04 million unrealized gain, and (ii) a $6.36 million reduction in interest expense.

 

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 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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Going Concern

 

We have incurred significant losses in prior periods. For the year ended December 31, 2020, we incurred a net loss of $30.12 million and, as of that date, we had an accumulated deficit of $219.80 million. For the year ended December 31, 2019, we incurred a net loss of $46.93 million and, as of that date, we had an accumulated deficit of $189.69 million. We expect to experience further significant net losses in 2021 and the foreseeable future. At December 31, 2020, we had a cash balance of approximately $0.89 million, compared to a cash balance of approximately $1.23 million at December 31, 2019. 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 common stock, and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. Management feels that our past and current efforts to trim cost and our recent marketing and promotional efforts to boost sales will lead to cash sustainability. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.

 

We anticipate receiving approximately $18 million over the next fifteen months as compensation for asset sales. In addition, we own shares of Hydrofarm stock that come off lock-up on June 9, 2021, the current value of which is $60.75 million. We anticipate these cash in-flows and acquisitions of complementary businesses to allow for our operations to grow to cash sustainability.

 

Given the risks and uncertainties regarding the future of our business due to COVID-19 and regulatory uncertainty, as well as our historical lack of profitability, there is doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements. However, management’s planned operational and investment remedies have mitigated the doubt. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. For additional information, see Item 1A – “Risk Factors”in Part I of this Annual Report on Form 10-K.

 

Sources and Uses of Cash

 

Cash Used in Operating Activities

 

Cash used in operating activities for the year ended December 31, 2020 was approximately $10.09 million, compared to approximately $12.51 million for the year ended December 31, 2019. The $2.42 million decrease in cash used was due to management’s efforts to conserve cash. Similar to 2019 when the company was waiting for the state of Nevada to approve our pending asset transfers, in 2020 management made every effort to conserve cash to persevere through the impact of COVID-19 and civil unrest.

 

Cash Used in Investing Activities

 

Cash provided by investing activities for the year ended December 31, 2020 was approximately $11.80 million, compared to $0.63 million for the year ended 2019, an increase of $11.17 million. This increase was driven by proceeds from sales of assets and collections on notes receivables.

 

Cash Provided by Financing Activities

 

Cash provided by financing activities for the year ended December 31, 2020 was approximately $2.70 million, compared to $8.14 million for the prior year. This is a decrease of $5.44 million year-over-year. The cash provided by financing activities in 2020 was predominantly from issuance of notes payable. The cash provided by financing activities in fiscal 2019 was primarily due to $13.00 million proceeds from the issuance of notes payable and $4.50 million from the sale of Common Stock and warrants. The Company also had a cash outflow related to the purchase of $6.25 million related to the purchase of an unaffiliated third parties interest in MediFarm I, MediFarm II, and MediFarm I RE

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

 
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Critical Accounting Policies

   

We disclose those accounting policies that we consider to be significant in determining the amounts to be utilized for communicating our consolidated financial position, results of operations and cash flows in Note 2 – “Summary of Significant Accounting Policies”to our consolidated financial statements included elsewhere herein. Our discussion and analysis of our financial condition, results of operations, and cash flows are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with these principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results are likely to differ from these estimates, but management does not believe such differences will materially affect our financial position or results of operations.

 

See Note 2 –“Summary of Significant Accounting Policies,”to our Financial Statements for further information on accounting policies that we believe to be critical, including our policies on:

 

Business Combinations

Revenue Recognition

Stock-Based Compensation

Notes Receivable

Goodwill

Long-Lived and Intangible Assets

Valuation of Inventory

Deferred Income Taxes

Fair Value Estimates

 

Recently Adopted and Issued Accounting Standards

 

See Note 2 – “Summary of Significant Accounting Policies”to our Financial Statements for information regarding accounting standards adopted in 2019 and other new accounting standards that were issued but not effective as of December 31, 2020.

  

Critical Accounting Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that have a significant impact on the results that we report in our financial statements. A critical accounting estimate is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective, or complex judgments that could have a material effect on our financial condition and results of operations.

 

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States and present a meaningful presentation of our financial condition and results of operations.

 

Our critical accounting estimates include:

 

 

·

Assumption as a going concern

 

·

Valuation of long-lived assets, including intangible assets and goodwill

 

·

Valuation of investments, including equity instruments

 

·

Valuation allowance for deferred tax assets

 

Below, we discuss this policy further, as well as the estimates and judgments involved. Actual results could differ from these estimates.

 

 
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Going Concern

 

Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

Valuation of Long-Lived Assets, Including Intangible Assets and Goodwill

 

We carry a variety of long-lived assets on our balance sheet including property, plant and equipment, goodwill, and other intangibles. Impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its fair value, and any impairment charge that we record reduces our operating income. Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. We conduct impairment tests on goodwill annually as of September 30, or more frequently whenever events or changes in circumstances indicate an impairment may exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Long-lived assets other than goodwill and indefinite-lived intangible assets, held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates recoverability of assets to be held and used and if the carrying value is not recoverable, management estimates the fair value of the asset and compares it to the carrying value. If the asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. Management determines the asset’s fair value utilizing estimates such as management’s short-term and long-term forecast of operating performance, the remaining useful life and service potential of the asset.

 

We perform our annual trade name impairment assessment by comparing the estimated fair value of the trade name to the carrying value. We utilize the Relief from Royalty method, which utilizes estimates and assumptions that include management’s revenue forecast, royalty rates avoided, and a discount rate based on the Company’s estimated cost of equity. In selecting appropriate royalty and discount rates, comparable public companies and royalty transactions are examined. Selection of appropriate comparable companies and royalty transactions involves a significant amount of judgement.

 

We perform our annual goodwill impairment assessment for the Black Oak Gallery reporting unit by comparing the estimated fair value of the reporting unit to the carrying value. We utilized the Guideline Public Company valuation method, which evaluates the prices paid for publicly traded company equities as the basis to determine the fair value of the subject company. The analysis involves significant assumptions regarding the selection of comparable public companies, revenue multiple, and control premium. When performing tests for impairment in between annual tests, management may at times use alternative approaches to estimating the fair value of the Black Oak Gallery reporting unit. These approaches consider trends in the Company’s overall market capitalization and operating results.

 

Valuation of Equity Instruments

 

As of December 31, 2020, the Company owned 593,261 common shares of Hydrofarm, a public company trading on the Nasdaq Global Select Market under the ticker symbol “HYFM.” The Company’s investment in Hydrofarm is stated at fair value and is presented in the “Short term investments” line within the consolidated balance sheet. As the Hydrofarm shares held by the Company are restricted from sale for a period of 180 days from the date of Hydrofarm’s initial public offering, the fair value of the Company’s investment is estimated utilizing the market price of the common shares at the end of each reporting period, less a discount for lack of marketability. The discount for marketability was estimated upon consideration of volatility and the length of the lock-up period.

 

As of December 31, 2020, the Company held 296,630 warrants to purchase one share of Hydrofarm’s common stock, with an exercise price of $16.86 per share. As the underlying shares are restricted from sale for a period of 180 days from the date of Hydrofarm’s initial public offering, the fair value of the warrants are estimated using the Black-Scholes option pricing model less a discount for lack of marketability. The discount for lack of marketability is estimated upon consideration of the volatility of the stock price and the remaining length of the lock-up period.

 

Valuation Allowance for Deferred Tax Assets

 

Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on the Company’s historical losses and the general economic conditions impacting our industry.

 

 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable because we are a Small Reporting Company.

   

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

  

See Pages F-1 through  F-38

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

 
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Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based on this evaluation, our management concluded that as of December 31, 2020 these disclosure controls and procedures were effective at the reasonable assurance level. As discussed below, our internal control over financial reporting is an integral part of our disclosure controls and procedures.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

 

1.

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

 

 

2.

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

 

 

3.

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of inherent limitations, no matter how well designed and operated, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance of achieving the desired control objectives. In addition, the design of internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

  

Our Chief Executive Officer and Chief Financial Officer have performed an evaluation of our internal control over financial reporting under the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective at December 31, 2020.

 

Based on the results of its assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2020 based on such criteria.

    

We believe that the consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2020 fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

 

 
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Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2020, that have materially affected, or are likely to materially affect, our internal control over financial reporting.

 

Inherent Limitation on the Effectiveness of Internal Controls

 

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 
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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Name

 

Director or Officer Since

 

Age

 

 

Positions

 

Nicholas Kovacevich

 

2020

 

 

35

 

 

Chairman of the Board

 

Francis Knuettel II

 

2020

 

 

54

 

 

Chief Executive Officer and Director

 

Steven J. Ross

 

2012

 

 

64

 

 

Director

 

Ira E. Ritter

 

2020

 

 

71

 

 

Director

 

Jeffrey Batliner

 

2020

 

 

55

 

 

Chief Financial Officer

 

Uri Kenig

 

2020

 

 

43

 

 

Interim Chief Operating Officer

 

 

Nicholas Kovacevich

Chairman of the Board

 

Mr. Kovacevich is the CEO of KushCo Holdings, Inc., a leading provider of ancillary products and services to businesses in the legal cannabis industry. Mr. Kovacevich graduated Summa Cum Laude from Southwest Baptist University with a Bachelor of Science in Sports Management. After college, Mr. Kovacevich began his entrepreneurial career by building and exiting Pack My Dorm. He continued on to found several other successful businesses including BigRentz, Inc., a leading online equipment rental company, and Alpha West Holdings, a diversified holding company whose portfolio businesses’ generate a combined $100M+ in annual sales. Recently, Kovacevich was appointed to California’s 32nd DAA Orange County Fair Board by California Governor Newsom.

 

Francis Knuettel II

Chief Executive Officer and Director

 

Mr. Knuettel has decades of experience in working with and advising public and private companies on financial management and controls, M&A, capital markets transactions and operating and financial restructurings. Mr. Knuettel was formerly Director of Capital and Advisory at Viridian Capital Advisors. He joined Veridian from One Cannabis Group ("OCG"), a leading cannabis dispensary franchisor, with over thirty cannabis dispensaries sold across seven states. At OCG, Mr. Knuettel was the Chief Financial Officer where he was responsible for all finance and accounting management. Prior to OCG, Mr. Knuettel was CFO at MJardin, a Denver-based cannabis cultivation and dispensary management company, where he led the company's IPO on the Canadian Securities Exchange. Following the IPO, Mr. Knuettel managed the merger with GrowForce, a Toronto-based cannabis cultivator, after which he moved over to the Chief Strategy Role. In his role as CSO, he managed the acquisition of several private companies before recommending and executing the consolidation of management and other operations to Toronto and the closure of the executive office in Denver. Prior to MJardin, Mr. Knuettel held numerous CFO and CEO positions at early-stage companies where he had significant experience both building and restructuring businesses. Mr. Knuettel graduated cum laude from Tufts University with a B.A. degree in Economics and from The Wharton School at the University of Pennsylvania with an M.B.A. in Finance and Entrepreneurial Management.

 

 
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Steven J. Ross

Director

 

Mr. Ross has served as a Director since July 23, 2012, and has over 30 years of senior management experience, ranging from high growth private companies to multi-billion dollar divisions of public enterprises. His experience also includes service on numerous public and private Boards. He is known as a problem solver who has demonstrated leadership and consistent results in challenging business situations across multiple industries. Mr. Ross served as CEO of Ecolane from June 2013 to November of 2020. Ecolane is a Helsinki, Finland-based software company providing disruptive, specialized software and support services for transportation scheduling, dispatching and tracking. US operations are headquartered in Wayne, PA, where the company supports statewide contracts in PA, NE, NC and OH and numerous state and local transportation agencies throughout the country. Ecolane was acquired by National Express PLC, a British publicly-traded leading international transportation company in June 2016, generating greater than 500% returns for Ecolane’s investors.

 

Prior to leading Ecolane, Mr. Ross was a Managing Director at MTN Capital Partners, a New York-based Private Equity firm, and Managing Partner of Belcourt Associates. Previously, Mr. Ross was CEO of National Investment Managers from 2006 until its sale to a Private Equity firm in 2011. Under Mr. Ross’ leadership, the company became the largest independent retirement services company in the country with over $11 billion in assets under administration and operations in 17 cities in the United States. Between 2001 and 2006, Mr. Ross served as Chairman and CEO of DynTek. During his tenure he successfully transitioned the company from a $5 million software development company to a leading provider of information technology services with annual revenues of over $100 million. From 1998 to 2001, Mr. Ross was Vice President and General Manager of the Computer Systems Division of Toshiba America with overall responsibility for Toshiba’s $3 billion computer business in the US and South America. Prior to joining Toshiba, from 1996 to 1998, Mr. Ross served as President & General Manager – Computer Reseller Division and President of Corporate Marketing at Inacom, a $7 billion Fortune 500 provider of computer products and services. Prior to his employment at Inacom, Mr. Ross served as Senior Vice President, Sales & Business Development, for Intelligent Electronics. Mr. Ross has also held senior management positions at Dell Computer Corporation and PTXI/Bull HN Information Systems. Mr. Ross has served as Vice-Chairman of the Board of the Computing Technology Industry Association (COMPTIA) and on the board of the US Internet Industry Association (USIIA). He also served on the Board of the national Cristina Foundation, and as a member of the Harvard Club of Orange County and the Harvard Business School Association of Orange County.

 

He is an active alumnus of Harvard University and a graduate of the Advanced Management Program at Harvard Business School. Steve has appeared as an industry and corporate spokesperson in numerous business and trade publications and events and was named #14 in Smart Reseller’s annual listing of top 50 computer industry executives.

 

Ira Ritter

Director

 

Mr. Ritter is a diversified entrepreneur who provides the Board of Directors with five decades of leadership and business experience. He co-founded Ritter Pharmaceuticals, Inc. and served as Executive Chairman from its 2004 inception through its merger with Qualigen Therapeutics in 2020. Mr. Ritter has provided corporate management, strategic planning and financial consulting for a wide range of market segments including: health and beauty products for Quality King Distributors; private label manufacturing & sales for General Nutrition Centers, K-Mart and Flemings; television broadcast, programming and subscription television for ON-TV/Oak Media, division of Oak Industries and as publisher of national consumer magazines and bestseller books.

 

He assisted taking Ritter Pharmaceuticals public on Nasdaq and Martin Lawrence Galleries public on the New York Stock Exchange. Presently, Mr. Ritter is a managing partner of Stonehenge Partners and serves on the Board of Directors for Qualigen Therapeutics, Inc. and the Advisory Board for Pepperdine’s Graziadio Business School of Social Entrepreneurship and Change. Previously, he has served as Board of Director for Vitavis Laboratories (sold to Nestle S.A.), SCWorx, The Bob Chandler Foundation and Environmental Quality Associates.

 

 
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Mr. Ritter has a long history of public service including appointments by three California Governors to several State Commissions including eight years as Commissioner on the California Prison Industry Authority and a Presidential appointment to the White House Environmental Task Force. He has guest lectured at University of Southern California’s Marshall School of Business and University of California, Los Angeles’ Anderson School of Management.

 

Jeffrey Batliner

Chief Financial Officer

 

Mr. Batliner, Chief Financial Officer of Terra Tech Corp., joined the Company in December of 2018 when he was hired as the Director of Financial Reporting, where his responsibilities focused on SEC Reporting as well as Financial Planning and Analysis. During Mr. Batliner’s tenure in that role, he was instrumental in improving internal and external reporting processes as well as implementing more robust budgeting and planning processes. Mr. Batliner was promoted to his current role as Chief Financial Officer on October 6, 2020. Prior to Terra Tech, he served in various Financial Planning and Analysis roles spanning multiple industries. From 1996 to 2003, he led the FP&A team for Canon USA’s computer peripheral products division. Mr. Batliner was at Sage, a global business software provider, from 2003 to 2014. He built out the finance team supporting Sage’s shared services division and led several FP&A teams supporting multiple business units. From 2015 to 2018, he created the FP&A team at Iteris, Inc., a transportation management firm, as the company experienced significant growth. Mr. Batliner holds a Master’s in Business Administration from Pepperdine University and a Bachelor’s in Finance from California State Fullerton.

 

Uri Kenig

Chief Operating Officer

 

Mr. Kenig is an experienced senior executive who has held large roles in numerous leading food, beverage, and retail industries. Most recently, Mr. Kenig was a Managing Partner at Alpha West Holdings, a venture capital firm. Mr. Kenig was formerly SVP of Growth and Operations at Urbanspace, a New York and London based company, where he led their portfolio growth through a series of initiatives. Prior to that he was an operating partner at a New York based private equity firm, Garnett Station Partners, where he oversaw a substantial growth of the firms' Burger King franchises from 22 restaurants to over 250, culminating in a large exit. He also oversaw the formation and execution of a Maaco franchise roll out culminating with over 40 locations, as well as a Massage Envy franchise rollout before its successful sale. Mr. Kenig also served in several senior leadership positions at Burger King Corporation, where he oversaw the revitalization of the company's Canadian operations and was responsible for a portfolio of over 1,200 franchises across 13 states, where he ensured effective expansion, operational excellence, and revenue generation. Mr. Kenig holds a Bachelor of Science from UNLV, where he graduated Magna Cum Laude, and also holds a Certificate of Leading with Finance from Harvard Business School Online and is certified in Six-Sigma through McKinsey.

 

Director Qualifications

 

We believe that our directors should have the highest professional and personal ethics and values, consistent with our values and standards. They should have broad experience at the policy-making level in business or banking. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties for us. Each director must represent the interests of all stockholders. When considering potential director candidates, the Board also considers the candidate’s character, judgment, diversity, age and skills, including financial literacy and experience in the context of our needs and the needs of the Board.

 

 
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Independent Director Agreements

 

Pursuant to an Independent Director Agreement dated July 1, 2019 with Steven J. Ross the Company agreed to pay Mr. Ross $12,500 per month for a period of three years beginning on July 1, 2019. The cash compensation includes $10,000 per month for service as a Director and $2,500 per month for service as the Chairperson of one or more board committees. The Company also issued to Mr. Ross 86,805 restricted shares of the Company’s common stock (“Common Stock”), all of which vested on the date of appointment, and an option to purchase an additional 86,805 shares of Common Stock with an exercise price of the closing price of the Common Stock on the date of the Director Agreements, which vest over a three-year period. In addition, a stock option and stock issuance of equivalent value are to be issued at the one year and two-year anniversary dates of the Director Agreement.

 

Pursuant to an Independent Director Agreement dated December 11, 2020 by and between us and Nicholas Kovacevich, we agreed to grant Mr. Kovacevich 150,000 restricted shares of stock, to be fully vested on the date of appointment. On February 1, 2021, the Company and Mr. Kovacevich amended the Independent Director Agreement. Per this amended agreement, (1) the Company issued to Mr. Kovacevich 500,000 restricted shares of the Company’s common stock (the “Common Stock”), which vest in twelve equal installments on the first day of each month beginning on March 1, 2021 (provided Mr. Kovacevich is a director of the Company on the applicable vesting date) and (2) the Company agreed to pay Mr. Kovacevich cash compensation of $5,000 per month, payable on the first day of each month beginning March 1, 2021 for the term of the Kovacevich Agreement.

 

Pursuant to an Independent Director Agreement dated December 11, 2020 by and between us and Ira Ritter, we agreed to grant Mr. Ritter 150,000 restricted shares of stock, to be fully vested on the date of appointment. On February 1, 2021, the Company and Mr. Ritter amended the Independent Director Agreement. Pursuant to the Ritter Agreement, (1) the Company issued to Mr. Ritter an option to purchase 500,000 shares of Common Stock at the closing price of the Common Stock on the date of the Ritter Agreement, which vest in twelve equal installments on the first day of each month beginning on March 1, 2021 (provided Mr. Ritter is a director of the Company on the applicable vesting date) and (2) the Company agreed to pay Mr. Ritter cash compensation of $5,000 per month, payable on the first day of each month beginning March 1, 2021 for the term of the Ritter Agreement.

 

Involvement in Certain Legal Proceedings

 

Other than as disclosed below, to our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years:

 

 

Any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;

 

Being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

Being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

Being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

 
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Code of Ethics

 

On November 4, 2015, our Board approved and adopted a Code of Ethics (the “Code of Ethics”) that applies to all of our directors, officers, and employees, including our principal executive officer and principal financial officer. The Code of Ethics addresses such individuals’ conduct with respect to, among other things, conflicts of interests; compliance with applicable laws, rules, and regulations; full, fair, accurate, timely, and understandable disclosure by us; competition and fair dealing; corporate opportunities; confidentiality; insider trading; protection and proper use of our assets; fair treatment; and reporting suspected illegal or unethical behavior. The Code of Ethics is available on our website at http://ir.terratechcorp.com/governance-docs.

 

Term of Office

 

Our directors are appointed to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our Bylaws. Our officers are appointed by our Board and hold office until removed by the Board, absent an employment agreement.

 

Section 16(A) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that our directors and executive officers and persons who beneficially own more than 10% of our Common Stock (referred to herein as the “Reporting Persons”) file with the SEC various reports as to their ownership of and activities relating to our Common Stock. To the best of our knowledge, all Reporting Persons complied on a timely basis with all filing requirements applicable to them with respect to transactions during the period covered by this report. In making these statements, we have relied solely on our review of copies of the reports furnished to us, representations that no other reports were required and other knowledge relating to transactions involving Reporting Persons.

 

Audit Committee and Audit Committee Financial Expert

 

On November 4, 2015, the Board established the Audit Committee and approved and adopted a charter (the “Audit Committee Charter”) to govern the Audit Committee. Mr. Ross was appointed to serve on the Audit Committee and designated as chairman. Subsequently on November 15, 2017, Mr. Gladstone was appointed to serve on the Audit Committee. On December 15, 2020, Mr. Kovacevich was appointed to serve on the Audit Committee. Mr. Gladstone resigned as a member of the Board on January 11, 2021.On February 1, 2021, Mr. Ritter was appointed to serve on the Audit Committee. Each member of the Audit Committee meets the independence requirements of The NASDAQ Stock Market, LLC and the SEC. The Audit Committee met five times during 2020. In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of the Audit Committee is to assist the Board in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee Charter can be found online at http://ir.terratechcorp.com/goverance-docs.

 

Compensation Committee

 

On November 4, 2015, the Board established the Compensation Committee and approved and adopted a charter (the “Compensation Committee Charter”). Mr. Ross and was appointed to serve on the Compensation Committee. Subsequently on November 15, Mr. Gladstone was appointed to serve as the Chairman of the Compensation Committee. On December 15, 2020, Mr. Ritter and Mr. Kovacevich were appointed to serve on the Compensation Committee, with Mr. Ritter designated as Chairman. Mr. Gladstone resigned as a member of the Board on January 11, 2021.Each member of the Compensation Committee meets the independence requirements of The NASDAQ Stock Market, LLC and the SEC, is a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act and is an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee held one meeting during 2019. In addition to the enumerated responsibilities of the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives and advise the Board on the adoption of policies that govern our compensation programs. The Compensation Committee Charter may be found online at http://ir.terratechcorp.com/governance-docs.

 

 
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Governance and Nominating Committee

 

On November 4, 2015, the Board established the Nominating Committee and approved and adopted a charter (the “Nominating Committee Charter”). Mr. Ross was appointed to serve on the Nominating Committee designated as chairman. Mr. Gladstone was appointed to serve on the Governance and Nominating Committee. On December 15, 2020, Mr. Kovacevich and Mr. Ritter were appointed to serve on the Governance and Nominating Committee. On January 11, 2021, Mr. Gladstone resigned as a member of the Board. On February 1, 2021, Mr. Kovacevich was appointed as Chairman. Each member of the Nominating Committee meets the independence requirements of The NASDAQ Stock Market, LLC and the SEC. The Nominating Committee held one meeting during 2019. In addition to the enumerated responsibilities of the Nominating Committee in the Nominating Committee Charter, the primary function of the Nominating Committee is to determine the slate of director nominees for election to the Board, to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to us and our stockholders, and any other related matters required by federal securities laws. The charter of the Nominating and Corporate Governance Committee may be found online at http://ir.terratechcorp.com/governance-docs.

 

Compensation Committee Interlocks and Insider Participation

 

No interlocking relationship exists between our Board of Directors and the Board of Directors or Compensation Committee of any other company, nor has any interlocking relationship existed in the past.

 

ITEM 11. EXECUTIVE COMPENSATION

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

 

All Other

 

 

 

Name and Principal

 

 

 

 

 

 

 

 

Awards

 

 

Option

 

 

Compensation

 

 

 

Position

 

Year

 

Salary

 

 

Bonus

 

 

(9)

 

Awards

 

 

(10)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Francis Knuettel II (1)

 

2020

 

$ -

 

 

$ -

 

 

$ 62,150

 

 

$ -

 

 

$ -

 

 

$ 62,150

 

Chief Executive Officer, President,  and Director

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jeffrey Batliner (2)

 

2020

 

$ 194,073

 

 

$ 20,000

 

 

$ 50,956

 

 

$ 7,440

 

 

$ 1,500

 

 

$ 273,969

 

Chief Financial Officer

 

2019

 

$ 133,016

 

 

$ -

 

 

$ 10,394

 

 

$ -

 

 

$ -

 

 

$ 143,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uri Kenig (3)

 

2020

 

$ 180,000

 

 

 

 

 

 

$ 25,350

 

 

$ -

 

 

$ -

 

 

$ 205,350

 

Interim Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derek Peterson (4)

 

2020

 

$ 333,540

 

 

$ -

 

 

$ -

 

 

$ 27,920

 

 

$ 6,000

 

 

$ 367,460

 

Former Chief Executive Officer, Former Chief Strategy Officer

 

2019

 

$ 309,000

 

 

$ -

 

 

$ -

 

 

$ 1,100,882

 

 

$ 6,000

 

 

$ 1,415,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Nahass (5)

 

2020

 

$ 305,966

 

 

$ -

 

 

$ -

 

 

$ 27,920

 

 

$ 6,000

 

 

$ 339,886

 

Former Chief Executive Officer, Former Chief Operating Officer

 

2019

 

$ 283,250

 

 

 

0

 

 

$ -

 

 

$ 1,100,882

 

 

$ 6,000

 

 

$ 1,390,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew Morgan (6)

 

2020

 

$ 51,000

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ 51,000

 

Former Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael James (7)

 

2020

 

$ 84,056

 

 

$ -

 

 

$ -

 

 

$ 685,466

 

 

$ 4,000

 

 

$ 773,522

 

Former Chief Financial Officer

 

2019

 

$ 257,500

 

 

$ 75,000

 

 

$ -

 

 

$ 706,906

 

 

$ 12,000

 

 

$ 1,051,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Megan Jimenez (8)

 

2020

 

$ 213,379

 

 

$ 20,000

 

 

$ 61,147

 

 

$ 8,376

 

 

$ 3,000

 

 

$ 305,901

 

Former Chief Financial Officer

 

2019

 

$ 176,658

 

 

$ 16,658

 

 

$ 8,292

 

 

$ -

 

 

$ -

 

 

$ 201,608

 

 

(1)

Appointed Director on December 11, 2020. Appointed Interim Chief Executive Officer and President on December 15, 2020. Note: designated as Chief Executive Officer and President on March 2, 2021.

(2)

Appointed Chief Financial Officer effective October 5, 2020.

(3)

Appointed Interim Chief Operating Officer effective December 18, 2020.

(4)

Appointed President, Chief Executive Officer and Chairman of the Board on February 9, 2012. Served as President until November 6, 2017. Served as CEO until February 14, 2020 when he moved into the Chief Strategy Officer position. Resigned as Chairman of the Board and Director, as well as Chief Strategy Officer, on January 22, 2021.

(5)

Appointed Director on January 26, 2012. Appointed Secretary and Treasurer on July 20, 2015. Appointed President and Chief Operating Officer on November 6, 2017. Resigned as Chief Operating Officer and Director on January 22, 2021.

(6)

Appointed CEO and Director on February 14, 2020. Resigned as CEO and Director on October 12, 2020.

(7)

Appointed Chief Financial Officer on February 9, 2012. Resigned as Chief Financial Officer on March 30, 2020.

(8)

Appointed Chief Financial Officer on March 31, 2020. Resigned as Chief Financial Officer on October 5, 2020.

(9)

For valuation purposes, the dollar amount shown represents the aggregate award date fair value of awards made in each fiscal year computed in accordance with FASB ASC Topic 718, Stock Compensation . The fair value is calculated based on the closing price of the Common Stock on the grant dates.

(10)

Amounts disclosed represent a car allowance of $500 per month per officer, except M.James, who received $1,000 per month.

 

 
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Employment Contracts, Termination of Employment, Change-in-Control Arrangements

 

Employment Contracts

 

On December 21, 2020, the Company entered into an Executive Employment Agreement (the “Kenig Employment Agreement”) with Uri Kenig, appointing Mr. Kenig as the Company’s Interim Chief Operating Officer. The Kenig Employment Agreement, is for a term of six months. Mr. Kenig’s compensation pursuant to the Kenig Employment Agreement is Ninety Thousand Dollars ($90,000) and he is eligible to receive a cash performance bonus at the discretion of the Board of Directors. Mr. Kenig was granted 150,000 fully-vested shares of the Company’s common stock and is entitled to an additional 150,000 fully-vested shares of Common Stock on the six-month anniversary of the Kenig Employment Agreement; provided it has not been terminated prior to that date. Mr. Kenig was also granted an option to purchase 300,000 shares of Common Stock with an exercise price equal to the closing price of the Common Stock on the trading day prior to the date of the Kenig Employment Agreement pursuant to the terms of the Company’s 2018 Equity Incentive Plan, which will vest 50% on the three-month anniversary of the Kenig Employment Agreement and 50% on the six-month anniversary of the Kenig Employment Agreement; provided it has not been terminated prior to either such date. In addition, Mr. Kenig is eligible to receive a bonus of 200,000 fully-vested shares of Common Stock and $20,000 upon closing of (A) a merger or consolidation of the Company or a subsidiary of the Company with another entity, or (B) the disposition by the Company of all or substantially all of the Company’s assets or the acquisition by the Company of all or substantially all of the assets of another entity entered into during the term of the Kenig Employment Agreement, in each case with a transaction value of over $20,000,000 and approved by the Board of Directors, whether or not he is then an employee of the Company. Mr. Kenig is eligible to participate in the Company’s 2018 Equity Incentive Plan, pursuant to which the Company may grant equity awards to its officers, directors and employees.

 

On December 18, 2020, Terra Tech Corp.  entered into an Executive Employment Agreement (the “Knuettel Employment Agreement”) with Francis Knuettel II, appointing Mr. Knuettel as the Company’s Interim Chief Executive Officer and President. The Knuettel Employment Agreement, is for a term of six months. Mr. Knuettel’s compensation pursuant to the Knuettel Employment Agreement is One Hundred and Fifty Thousand Dollars ($150,000) and he is eligible to receive a cash performance bonus at the discretion of the Board of Directors. Mr. Knuettel was granted 200,000 fully-vested shares of the Company’s common stock and is entitled to an additional 200,000 fully-vested shares of Common Stock on the six-month anniversary of the Knuettel Employment Agreement; provided it has not been terminated prior to that date. Mr. Knuettel was also granted an option to purchase 600,000 shares of Common Stock with an exercise price equal to the closing price of the Common Stock on the trading day prior to the date of the Knuettel Employment Agreement pursuant to the terms of the Company’s 2018 Equity Incentive Plan, which will vest 50% on the three-month anniversary of the Knuettel Employment Agreement and 50% on the six-month anniversary of the Knuettel Employment Agreement; provided it has not been terminated prior to either such date. In addition, Mr. Knuettel is eligible to receive a bonus of 400,000 fully-vested shares of Common Stock and $40,000 upon closing of (A) a merger or consolidation of the Company or a subsidiary of the Company with another entity, or (B) the disposition by the Company of all or substantially all of the Company’s assets or the acquisition by the Company of all or substantially all of the assets of another entity entered into during the term of the Knuettel Employment Agreement, in each case with a transaction value of over $20,000,000 and approved by the Board of Directors, whether or not he is then an employee of the Company. Mr. Knuettel is eligible to participate in the Company’s 2018 Equity Incentive Plan, pursuant to which the Company may grant equity awards to its officers, directors and employees.

 

 
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On September 28, 2020, Terra Tech Corp. entered into an Executive Employment Agreement (the “Employment Agreement”) with Jeffrey Batliner, formerly the Company’s Director of Reporting & Analysis, appointing Mr. Batliner as the Company’s Chief Financial Officer, effective October 5, 2020. The Employment Agreement, is for a term of one year. Mr. Batliner’s base salary shall be Two Hundred Thousand Dollars ($200,000) and he shall also be eligible for a performance bonus of up to 100% of his base salary (“Target Performance Bonus”). The Target Performance Bonus shall be based on performance and achievement of Company goals and objectives as defined by the Board of Directors or Compensation Committee and may be greater or less than the Target Performance Bonus. Mr. Batliner may be eligible for severance benefits under certain circumstances as set forth in the Employment Agreement.

 

Resignation Agreements

 

On January 22, 2021, the Company entered into a Resignation and Release Agreement with Michael A. Nahass (the “Nahass Resignation Agreement”), pursuant to which Mr. Nahass agreed to resign from his positions as a director, executive officer and employee of the Company effective immediately upon the Company’s closing of a private placement in the amount of not less than $3,500,000, which is expected to occur on or about January 25, 2021 upon the closing of the transactions contemplated by the Securities Purchase Agreement. In addition, the Company extended the time within which vested common stock options held by Mr. Nahass may be exercised to 150 days after the date of resignation.

 

On January 22, 2021, the Company entered into a Resignation and Release Agreement with Derek Peterson (the “Peterson Resignation Agreement” and, together with the Nahass Resignation Agreement, the “Resignation Agreements”), pursuant to which Mr. Peterson agreed to resign from his positions as a director, executive officer and employee of the Company effective immediately upon the Company’s closing of a private placement in the amount of not less than $3,500,000, which is expected to occur on or about January 25, 2021 upon the closing of the transactions contemplated by the Securities Purchase Agreement. In addition, the Company extended the time within which vested common stock options held by Mr. Peterson may be exercised to 150 days after the date of resignation.

  

Director Compensation

 

The following table sets forth director compensation for the year ended December 31, 2020:

 

 

 

Fees Earned

Paid in

Cash

 

 

Stock

Awards

 

 

Option

Awards

 

 

Total

 

Name (1)

 

($)

 

 

($) (6)

 

 

($)

 

 

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nicholas Kovacevich (2)

 

$ -

 

 

$ 28,500

 

 

$ -

 

 

$ 28,500

 

Ira Ritter (3)

 

$ -

 

 

$ 28,500

 

 

$ -

 

 

$ 28,500

 

Steven Ross (4)

 

$ 150,000

 

 

$ 59,549

 

 

$ 263,082

 

 

$ 472,630

 

Alan Gladstone (5)

 

$ 150,000

 

 

$ 59,549

 

 

$ 496,146

 

 

$ 705,694

 

  

(1)

Francis Knuettel, Michael Nahass, and Derek Peterson are not included in this table as they were executive officers during fiscal 2020, and thus received no compensation for their service as directors. The compensation of Mr. Knuettel, Mr. Nahass, and Mr. Peterson as our employees is shown in “Item 11 Executive Compensation – Summary Compensation Table.”

(2)

Appointed as a director on December 10, 2020.

(3)

Appointed as a director on December 10, 2020.

(4)

Appointed as a director on July 23, 2012.

(5)

Appointed as a director on November 15, 2017. Resigned as a director on January 11, 2021.

(6)

For valuation purposes, the dollar amount shown represents the aggregate award date fair value of awards made in fiscal 2020 computed in accordance with FASB ASC Topic 718, “Stock Compensation”. The fair value is calculated based on the closing price of the Common Stock on the grant dates.

 

 
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Narrative to Director Compensation Table

 

The following is a narrative discussion of the material information that we believe is necessary to understand the information disclosed in the previous table.

 

Nicholas Kovacevich

 

Mr. Kovacevich received 150,000 shares of Common Stock at $0.19 per share when he joined the Board on December 11, 2020.

 

Ira Ritter

 

Mr. Ritter received 150,000 shares of Common Stock at $0.19 per share when he joined the Board on December 11, 2020.

 

Steven J. Ross

 

Mr. Ross earned cash fees for his services as a director in fiscal 2020 in the amount of $0.15 million. Mr. Ross earned cash fees for his services as a director in fiscal 2019 in the amount of $0.14 million.

 

On July 1, 2020, we granted Mr. Ross a ten-year option to acquire 454,545 shares of Common Stock at $0.11 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-sixth (1/6) vested.

 

On April 2, 2020, we granted Mr. Ross a ten-year option to acquire 1,250,000 shares of Common Stock at $0.07 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-quarter (1/4) vested.

 

On June 20, 2019, we granted Mr. Ross a ten-year option to acquire 500,000 shares of Common Stock at $0.585 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-half (1/2) vested. On July 1, 2019, we granted Mr. Ross a ten-year option to acquire 86,805 shares of Common Stock at $0.576 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-half (1/2) vested.

 

On December 11, 2018, we granted Mr. Ross a ten-year option to acquire 300,000 shares of Common Stock at $1.00 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was three-quarters (3/4) vested. On July 30, 2018, we granted Mr. Ross a ten-year option to acquire 55,000 shares of Common Stock at $2.02 per share. The option is in consideration of the services to be rendered, which vested upon issuance and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was ten-twelfths (10/12) vested.

 

 
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Alan Gladstone

 

Mr. Gladstone earned cash fees for his services as a director in fiscal 2020 in the amount of $0.15 million. Mr. Gladstone earned cash fees for his services as a director in fiscal 2019 in the amount of $0.16 million.

 

On July 1, 2020, we granted Mr. Gladstone a ten-year option to acquire 454,545 shares of Common Stock at $0.11 per share,. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-sixth (1/6) vested.

 

On April 2, 2020, we granted Mr. Gladstone a ten-year option to acquire 1,500,000 shares of Common Stock at $0.07 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-quarter (1/4) vested.

 

On June 20, 2019, we granted Mr. Gladstone a ten-year option to acquire 700,000 shares of Common Stock at $0.585 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-half (1/2) vested. On July 1, 2019, we granted Mr. Gladstone a ten-year option to acquire 86,805 shares of Common Stock at $0.576 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was one-half (1/2) vested.

 

On December 11, 2018, we granted Mr. Gladstone a ten-year option to acquire 600,000 shares at $1.00 per share. The option is in consideration of the services to be rendered, which shall vest and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was three-quarters (3/4) vested. On July 30, 2018, we granted Mr. Gladstone a ten-year option to acquire 100,000 shares of Common Stock at $2.02 per share. The option is in consideration of the services to be rendered, which vested upon issuance and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was ten-twelfths (10/12) vested. On January 30, 2018, we granted Mr. Gladstone a ten-year option to acquire 66,667 shares of Common Stock at $4.68 per share. The option is in consideration of the services to be rendered, which vested upon issuance and become exercisable with respect to one-twelfth (1/12) each quarter until the option is one hundred percent (100.0%) vested. As of December 31, 2020, the option was completely vested.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Equity Compensation Plan Information

 

On December 11, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive Plan (the “Plan”). On June 20, 2019, the Company adopted the Amended and Restated 2018 Equity Incentive Plan (the “2018 Plan”), and our stockholders approved the Plan at our annual meeting of stockholders that was held September 23, 2019. Pursuant to the terms of the 2018 Plan, the maximum number of shares of Common Stock available for the grant of awards under the 2018 Plan shall not exceed 13,000,000 shares. During the years ended December 31, 2020 and 2019, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 6.59 million and 5.80 million shares of Common Stock, respectively. The options have exercise prices of $0.58 - $1.00 per share, and generally vest quarterly over a three-year period.

 

During the year ended December 31, 2019, the Company granted ten-year options to directors, officers, and employees, pursuant to which such individuals are entitled to exercise options to purchase an aggregate of up to 1.06 million shares of Common Stock that were not subject to the 2016 Equity Plan or the 2018 Equity Plan. The options have exercise prices ranging from $2.02 to $3.75 per share, and generally vest quarterly over a three-year period.

 

 
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On February 14, 2020, the Board approved an amendment (the “Plan Amendment”) to the Company’s Amended and Restated 2018 Equity Incentive Plan (the “Plan”) to increase the number of shares available for issuance thereunder by 28,976,425 million shares of Terra Tech common stock for a total of 43,976,425 shares of Terra Tech common stock, plus the number of shares, not to exceed 2,000,000 million shares, that may become available under the Company’s 2016 Equity Incentive Plan after termination of awards thereunder, subject to adjustment in accordance with the terms of the Plan.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth certain information as of March 16, 2021 with respect to the holdings of: (1) each person known to us to be the beneficial owner of more than 5.0% of our Common Stock; (2) each of our directors, nominees for director and executive officers; and (3) all directors and executive officers as a group. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, at the address of 2040 Main Street, Suite 225, Irvine, California 92614.

 

In computing the number and percentage of shares beneficially owned by each person, we include any shares of Common Stock that could be acquired within 60 days of March 16, 2021 by the conversion or exercise of shares of option awards. These shares, however, are not counted in computing the percentage ownership of any other person.

 

Name and Address of Beneficial Owner

 

Title of Class

 

Amount and

Nature of

Beneficial

Ownership

 

 

Percent of

Common

Stock(1)

 

 

 

 

 

 

 

 

 

 

Derek Peterson

 

Common Stock

 

 

18,278,747

(2)

 

 

7.89 %

Steven Ross

 

Common Stock

 

 

2,105,527

(3)

 

*

 

Jeffrey Batliner

 

Common Stock

 

 

600,887

(4)

 

*

 

Francis Knuettel II

 

Common Stock

 

 

450,000

(5)

 

*

 

Uri Kenig

 

Common Stock

 

 

300,000

(6)

 

*

 

Nicholas Kovacevich

 

Common Stock

 

 

274,998

 

*

 

Ira Ritter

 

Common Stock

 

 

274,998

(7)

 

*

 

All Directors and Executive Officers as a Group (6 persons)

 

 

 

 

4,006,410

 

 

 

1.73 %

 

*

Represents beneficial ownership of less than one percent of the outstanding shares of our Common Stock.

(1)

As of March 16, 2021, we had a total of 234,062,627 shares of Common Stock issued and 231,754,219 shares outstanding.

(2)

Mr. Peterson disclaims any beneficial ownership interest in the 989,574 shares of Common Stock held by his spouse, Amy Almsteier.

(3)

Includes 1,466,700 shares of Common Stock underlying vested options.

(4)

Includes 316,667 shares of Common Stock underlying vested options.

(5)

Includes 300,000 shares of Common Stock underlying vested options.

(6)

Includes 150,000 shares of Common Stock underlying vested options.

(7)

Includes 124,998 shares of Common Stock underlying vested options.

 

 
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There are no arrangements known to us that might, at a subsequent date, result in a change-in-control.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

Except as described below, during the past fiscal year, there have been no transactions, whether directly or indirectly, between us and any of our respective officers, directors, beneficial owners of more than 5.0% of our outstanding Common Stock or their family members, that exceeded the lesser of $0.12 million or 1.0% of the average of our total assets at year-end for the last completed fiscal year.

 

During the fiscal year ended December 31, 2019, the Company issued promissory notes totaling $1.80 million to OneQor Technologies, Inc (“OneQor”). Derek Peterson and Mike Nahass, the Chief Executive Officer and Chief Operating Officer, respectively at that time. Both had minority ownership interests in OneQor.

 

On December 30, 2019, the Company entered into a $0.50 million secured promissory note agreement with the Matthew Lee Morgan Trust, which is affiliated with Matthew Morgan, the Chief Executive Officer of OneQor Technologies, Inc. (“OneQor”). Derek Peterson, Chief Executive Officer of Terra Tech and Michael Nahass, President of Terra Tech are minority interest holders in OneQor. The note matures on January 30, 2021, and bears interest at a rate of 10% per annum. The note was converted to the Company’s common stock at maturity.

 

On March 30, 2020, Edible Garden Corp. (“Edible Garden”), a wholly-owned subsidiary of Terra Tech Corp. (the “Company”), entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with Edible Garden Incorporated (the “Purchaser”), pursuant to which Edible Garden sold and the Purchaser purchased substantially all of the assets of Edible Garden (the “Business”). The aggregate consideration paid for the Business was a five-year $3,000,000 secured promissory note bearing interest at 3.5% per annum. Michael James, the Company’s former Chief Financial Officer, is a principal of the Purchaser. There is no material relationship between the Company or its affiliates and the Purchaser other than as set forth in the previous sentence. The Purchase Agreement contains customary conditions, representations, warranties, indemnities and covenants by, among, and for the benefit of the parties.

 

Pursuant to an Independent Director Agreement dated July 1, 2019 by and between us and Steven J. Ross, we agreed to pay Mr. Ross $12,500 per month for a period of three years. We also issued to Mr. Ross an aggregate of 86,805 restricted shares of Common Stock, of which all of the shares vested on the date of appointment.

 

Pursuant to an Independent Director Agreement dated December 11, 2020 by and between us and Francis Knuettel II, we agreed to grant Mr. Knuettel 150,000 restricted shares of stock, to be fully vested on the date of appointment. On December 18, 2020, Terra Tech Corp entered into an Executive Employment Agreement with Mr. Knuettel, appointing Mr. Knuettel as the Company’s Interim Chief Executive Officer and President. Therefore Mr. Knuettel was no longer considered an independent director.

   

Pursuant to an Independent Director Agreement dated December 11, 2020 by and between us and Nicholas Kovacevich, we agreed to grant Mr. Kovacevich 150,000 restricted shares of stock, to be fully vested on the date of appointment. On February 1, 2021, the Company and Mr. Kovacevich amended the Independent Director Agreement. Per this amended agreement, (1) the Company issued to Mr. Kovacevich 500,000 restricted shares of the Company’s common stock (the “Common Stock”), which vest in twelve equal installments on the first day of each month beginning on March 1, 2021 (provided Mr. Kovacevich is a director of the Company on the applicable vesting date) and (2) the Company agreed to pay Mr. Kovacevich cash compensation of $5,000 per month, payable on the first day of each month beginning March 1, 2021 for the term of the Kovacevich Agreement.

 

Pursuant to an Independent Director Agreement dated December 11, 2020 by and between us and Ira Ritter, we agreed to grant Mr. Ritter 150,000 restricted shares of stock, to be fully vested on the date of appointment. On February 1, 2021, the Company and Mr. Ritter amended the Independent Director Agreement. Pursuant to the Ritter Agreement, (1) the Company issued to Mr. Ritter an option to purchase 500,000 shares of Common Stock at the closing price of the Common Stock on the date of the Ritter Agreement, which vest in twelve equal installments on the first day of each month beginning on March 1, 2021 (provided Mr. Ritter is a director of the Company on the applicable vesting date) and (2) the Company agreed to pay Mr. Ritter cash compensation of $5,000 per month, payable on the first day of each month beginning March 1, 2021 for the term of the Ritter Agreement.

 

 
46

Table of Contents

 

Director Independence

 

Our Board is currently composed of four members. Our Common Stock is not currently listed for trading on a national securities exchange and, as such, we are not subject to any director independence standards. However, we have determined that three directors, Steven Ross, Nicholas Kovacevich, and Ira Ritter,, each qualifies as an independent director. We evaluated independence in accordance with Rule 5605 of the NASDAQ Stock Market.

 

The Board currently has three separately designated standing committees: (i) the Audit Committee, (ii) the Compensation Committee, and (iii) the Governance and Nominating Committee. All three of these committees are solely comprised of independent directors.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table presents fees paid or to be paid for professional audit services rendered by Marcum LLP for the audit of our annual financial statements and fees billed for other services rendered for the years ended December 31, 2020 and 2019:

 

 

 

Year Ended

 

 

 

December 31,

 

 

 

2020

 

2019

 

 

 

 

 

 

 

 

Audit Fees (1)

 

$

       270,030

 

$

    611,587

 

  

(1)

Audit Fees consisted of fees billed for professional services rendered for the audit of the Company’s annual financial statements and internal control over financial reporting, review of the interim financial statements included in quarterly reports, and review of other documents filed with the SEC within those fiscal years.

 

The Board, or the Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is specific to the particular service or category of services and is generally subject to a specific budget. In addition, the Audit Committee has delegated pre-approval authority to its Chairman who, in turn, must report any pre-approval decisions to the Audit Committee at its next scheduled regular meeting. Our independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by our independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. The Board, or the Audit Committee, as applicable, pre-approved all fees for audit and non-audit work performed during fiscal 2020 and 2019.

 

 
47

Table of Contents

  

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)

The following documents are filed as part of this Annual Report:

 

 

(1)

Financial Statements – See Index on page F-1

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

Consolidated Financial Statements:

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2020 and 2019

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 
48

Table of Contents

 

(b)

The following exhibits are filed herewith as a part of this report:

   

Exhibit

 

Description

 

2.1

 

Agreement and Plan of Merger dated February 9, 2012, by and among Terra Tech Corp., TT Acquisitions, Inc., and GrowOp Technology Ltd. (1)

2.2

 

Articles of Merger (1)

2.3

 

Share Exchange Agreement, dated April 24, 2013, by and among the Terra Tech Corp., Edible Garden Corp., and the holders of common stock of Edible Garden Corp. (2)

2.4

 

Agreement and Plan of Merger, dated December 23, 2015, by and among Terra Tech Corp., Generic Merger Sub, Inc., and Black Oak Gallery (3)

2.5

 

First Amendment to Agreement and Plan of Merger, dated February 29, 2016, by and among Terra Tech Corp., Generic Merger Sub, Inc., and Black Oak Gallery (3)

2.6

 

Form of Agreement of Merger, dated March 31, 2016, by and among Generic Merger Sub, Inc. and Black Oak Gallery (3)

2.7

 

Agreement and Plan of Merger, dated as of October 30, 2019, by and among Terra Tech, OneQor, Merger Sub, Matthew Morgan, Larry Martin and the Shareholder Representative (4)

2.8

 

Amendment No. 1 to Agreement and Plan of Merger, dated as of December 2, 2019, by and among Terra Tech, OneQor, Merger Sub, Matthew Morgan, Larry Martin and the Shareholder Representative (5)

2.9

 

Amendment No. 2 to Agreement and Plan of Merger, dated as of February 14, 2020, by and among Terra Tech, OneQor, Merger Sub, Matthew Morgan, Larry Martin and the Shareholder Representative (6)

2.10

Agreement and Plan of Merger, dated March 2, 2021 (7)

3.1

 

Articles of Incorporation dated July 22, 2008 (8)

3.2

 

Amended and Restated Bylaws (9)

3.3

 

Certificate of Amendment dated July 8, 2011 (10)

3.4

 

Certificate of Change dated July 8, 2011 (10)

3.5

 

Certificate of Amendment dated January 27, 2012 (1)

3.6

 

Form of Amended and Restated Articles of Incorporation of Black Oak Gallery, a California corporation (3)

3.7

 

Certificate of Amendment to Certificate of Designation of Series B Preferred Stock, dated September 27, 2016 (11)

3.8

 

Certificate of Amendment to Articles of Incorporation, dated September 26, 2016 (12)

 

 
49

Table of Contents

 

3.9

 

Certificate of Amendment to Certificate of Designation of Series B Preferred Stock, dated October 3, 2016 (13)

3.10

 

Certificate of Amendment to Certificate of Designation of Series B Preferred Stock, dated July 26, 2017 (14)

3.11

 

Certificate of Designation for Series A Preferred Stock (15)

3.12

 

Amended and Restated Certificate of Designation for Series B Preferred Stock (3)

3.13

 

Certificate of Designation for Series A Preferred Stock (12)

3.14

 

Amended and Restated Certificate of Designation for Series B Preferred Stock (3)

3.15

 

Amendment to Series A Preferred Stock certificate of designation, dated January 26, 2021 (16)

3.16

 

Certificate of Withdrawal of Certificate of Designation of Series A Preferred Stock (9)

3.17

 

Certificate of Withdrawal of Certificate of Designation of Series B Preferred Stock (9)

4.1

 

Form of Amendment No. 1 to 7.5% Senior Convertible Promissory Note, dated December 1, 2020 (17)

4.2

 

Form of Amendment No. 2 to 7.5% Senior Convertible Promissory Note, dated January 11, 2021 (18)

4.3

 

Form of Amendment No. 3 to 7.5% Senior Convertible Promissory Note (19)

4.4

 

Form of Amendment No. 1 to 7.5% Senior Convertible Promissory Note (19)

4.5

 

Form of Common Stock Purchase Warrant (19)

4.6

 

Form of 3.0% Senior Convertible Promissory Note (19)

4.7

 

Form of Common Stock Purchase Warrant (“A Warrant”) (19)

4.8

 

Form of Common Stock Purchase Warrant (“B Warrant”) (19)

4.9

 

Form of Straight Promissory Note (19)

4.10

 

Securities Purchase Agreement, dated January 22, 2021 (19)

4.11

 

Form of Secured Promissory Note (20)

4.12

 

Common Stock Purchase Warrant*

10.1

 

2016 Equity Incentive Plan (3)

10.2

 

Form of Terra Tech Corp. Amended and Restated 2018 Equity Incentive Plan (21)

10.3

 

Amendment to Terra Tech Corp. Amended and Restated 2018 Equity Incentive Plan dated as of February 14, 2020 (6)

10.4

 

Lease dated January 1, 2015, by and between Whitetown Realty, LLC and Edible Garden Corp. (3)

10.5

 

Guaranty dated January 1, 2015, by Terra Tech Corp. in favor of Whitetown Realty, LLC (3)

10.6

 

Sublease dated March 29, 2016, by and between Black Oak Gallery and CCIG Properties, LLC, dated March 29, 2016 (22)

10.7

 

Amended and Restated Executive Employment Agreement, dated as of October 29, 2019, by and between OneQor and Matthew Morgan, as amended by Amendment to Amended and Restated Executive Employment Agreement, dated as of February 13, 2020, by and between Matthew Morgan and OneQor (6)

10.8

 

Amendment and Waiver Agreement, dated as of February 14, 2020, by and between Terra Tech and Derek Peterson (6)

10.9

 

Forfeiture Agreement, dated as of February 14, 2020, by and between Terra Tech and Derek Peterson. (6)

10.10

 

Forfeiture Agreement, dated as of February 14, 2020, by and between Terra Tech and Michael Nahass. (6)

10.11

 

Forfeiture Agreement, dated as of March 9, 2020, by and between Terra Tech and Derek Peterson (23)

10.12

 

Forfeiture Agreement, dated as of March 9, 2020, by and between Terra Tech and Michael Nahass(23)

10.13

 

Asset Purchase Agreement, dated as of March 30, 2020 (24)

10.14

 

Executive Employment Agreement, dated as of March 30, 2020 (24)

10.15

 

Asset Purchase Agreement, dated as of April 15, 2020 (25)

10.16

 

Standard Offer, Agreement and Escrow Instructions for Purchase of Real Estate, dated as of April 13, 2020 (25)

10.17

 

Executive Employment Agreement, dated as of September 28, 2020 (26)

    

 
50

Table of Contents

 

10.18

 

Amendment Agreement, dated as of October 12, 2020 (27)

10.19

 

Forfeiture Agreement, dated as of October 12, 2020 (27)

10.20

Confidential Separation Agreement, dated as of October 12, 2020 (27)

10.21

Letter Agreement, dated October 22, 2020 (28)

10.22

Independent Director Agreement between Terra Tech Corp. and Nicholas Kovacevich, dated December 11, 2020 (29)

10.23

Independent Director Agreement between Terra Tech Corp. and Ira E. Ritter, dated December 11, 2020 (29)

10.24

Independent Director Agreement between Terra Tech Corp. and Francis Knuettel II, dated December 11, 2020 (29)

10.25

Director Indemnification Agreement between Terra Tech Corp. and Nicholas Kovacevich, dated December 11, 2020 (29)

10.26

Director Indemnification Agreement between Terra Tech Corp. and Ira E. Ritter, dated December 11, 2020 (29)

10.27

Director Indemnification Agreement between Terra Tech Corp. and Francis Knuettel II, dated December 11, 2020 (29)

10.28

Executive Employment Agreement between Terra Tech Corp. and Francis Knuettel II, dated December 18, 2020 (30)

10.29

Executive Employment Agreement between Terra Tech Corp. and Uri Kenig, dated December 21, 2020 (30)

10.30

Amendment and Waiver Agreement between Terra Tech Corp. and Michael Nahass, dated December 18, 2020 (30)

10.31

Loan Agreement Amendment, dated January 7, 2021 (18)

10.32

Indemnification Agreement, dated January 7, 2021 (18)

10.33

Indemnification Agreement, dated January 7, 2021 (18)

10.34

Separation Agreement, dated January 11, 2021 (18)

10.35

Securities Purchase Agreement, dated January 22, 2021 (19)

10.36

Form of Registration Rights Agreement (19)

10.37

Form of Series A Preferred Stock Purchase Agreement (19)

10.38

Form of Resignation and Release Agreement (19)

10.39

Form of Resignation and Release Agreement (19)

10.40

Form of Lock-Up Agreement (19)

10.41

 

Lock-up Agreement*

10.42

 

Registration Rights Agreement*

10.43

Independent Director Agreement between Terra Tech Corp. and Nicholas Kovacevich, dated February 1, 2021 (9)

10.44

Independent Director Agreement between Terra Tech Corp. and Ira Ritter, dated February 1, 2021(9)

10.45

 

Restricted Stock Award Agreement*

10.46

Form of Lock-Up Agreement (7)

10.47

 

Form of Loan Agreement (20)

10.48

 

Form of Guaranty Agreement (20)

10.49

 

Form of Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing (20)

10.50

 

Standard Purchase Agreement (31)

10.51

 

Assignment (31)

10.52

 

Form of Loan Agreement (31)

10.53

 

Form of Guaranty Agreement (31)

10.54

 

Form of Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing (31)

14.1

 

Code of Ethics (32)

21.1

 

List of Subsidiaries*

23.1

 

Consent of Marcum LLP*

24.0

 

Power of Attorney (set forth on the signature page of this Annual Report on Form 10-K)*

31.1

 

Certification of Francis Knuettel II, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2

 

Certification of Jeffrey Batliner, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1

 

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

32.2

 

Certification of Jeffrey Batliner, 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 *

 

 
51

Table of Contents

____________

(1)

Incorporated by reference to Current Report on Form 8-K, filed with the SEC on February 10, 2012.

(2)

Incorporated by reference to Current Report on Form 8-K, filed with the SEC on May 6, 2013.

(3)

Incorporated by reference to Annual Report on Form 10-K filed with the SEC on March 29, 2016

(4)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on November 4, 2019

(5)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on December 3, 2019

(6)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on February 18, 2020

(7)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on March 3, 2021

(8)

Incorporated by reference to Registration Statement on Form S-1, filed with the SEC on December 23, 2008.

(9)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on February 4, 2021

(10)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on September 28, 2016

(11)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on October 7, 2016

(12)

Incorporated by reference to Amendment No. 3 to Current Report on Form 8-K filed with the SEC on April 19, 2012

(13)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on March 2, 2015.

(14)

Incorporated by reference to Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016

(15)

Incorporated by reference to Current Report on Form 8-K, filed with the SEC on May 28, 2013.

(16)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on February 1, 2021

(17)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on December 2, 2020

(18)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on January 13, 2021

(19)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on January 25, 2021

(20)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on January 19, 2018

(21)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on June 26, 2019

(22)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on April 5, 2016

(23)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on March 16, 2020

(24)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on April 3, 2020

(25)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on April. 17, 2020

(26)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on September 28, 2020

(27)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on October 13, 2020

(28)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on October 28, 2020

(29)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on December 14, 2020

(30)

Incorporated by reference to Current Report on Form 8-K/A filed with the SEC on December 21, 2020

(31)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on October 12, 2018

(32)

Incorporated by reference to Current Report on Form 8-K filed with the SEC on November 5, 2015

*

filed herewith

 

 
52

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TERRA TECH CORP. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   

 

 

Page

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm – Marcum LLP

 

 

F-2

 

 

 

 

 

 

Consolidated Financial Statements:

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2020 and 2019

 

 

F-3

 

 

 

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019

 

 

F-4

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019

 

 

F-5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

 

 

F-6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

F-7

 

   

 
F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Terra Tech Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Terra Tech Corp. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Goodwill – Impairment Assessment for the Black Oak Gallery Reporting Unit

 

As described in Note 8 to the financial statements, the Company performed its annual evaluation of goodwill for the Black Oak Gallery reporting unit for impairment by comparing the estimated fair value of the Black Oak Gallery reporting unit to its carrying value. The Company used a market approach to determine the estimated fair value of the Black Oak Gallery reporting unit, whereby the Company applied a market multiple against the forecasted revenue for the Black Oak Gallery reporting unit, before applying a control premium.

 

The principal considerations for our determination that performing procedures relating to evaluating the recoverability of the carrying value of goodwill is a critical audit matter, are that there is significant judgment by management in the estimation of forecasted revenue, the market multiple to apply and the control premium to use. This in turn led to high degree of auditor judgment, subjectivity and effort in performing audit procedures in evaluating audit evidence related to management’s estimates and assumptions used in the forecasted revenue and model. Also, the evaluation of audit evidence related to goodwill impairment required significant auditor judgment as the nature of the evidence is often subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

Addressing the matter involved performing procedures and evaluating evidence in connection with forming our overall audit opinion on the consolidated financial statements. These procedures included, among others, (i) evaluating management’s selection of comparable peer companies used in determining the revenue growth rate; (ii) evaluating management’s determination of the market multiple; (iii) evaluating the control premium used by management; and (iv) corroborating the inputs used in management’s model. Professionals with specialized skill and knowledge were used to assist in the evaluation of the measurement of the Company’s estimated fair value of the Black Oak Gallery reporting unit.

 

Income Taxes – Uncertain Tax Positions

 

As described in Note 12 to the financial statements, the Company’s subsidiaries that produced and sold cannabis or cannabis pure concentrates are subject to the limits of Internal Revenue Code Section 280E, which only allows the Company to deduct expenses directly related to sales of product for federal tax purposes. This requires management to make estimates and judgments relating to the bifurcation of expenses between direct costs of sales versus other operating expenses for such subsidiaries. This also requires management to make judgments as to whether the deduction of operating expenses at the parent company that provides corporate oversight and other services to such subsidiaries, which is an uncertain tax position, met the “more-likely-than-not” recognition threshold

 

The principal considerations for our determination that performing procedures relating to the uncertain tax position was a critical audit matter, are that there is significant judgment by management in estimating the operating expenses at the parent company that are unrelated to the business activity of trafficking cannabis related products, including a high degree of estimation uncertainty due to the complexity of tax laws, lack of guidance from the Internal Revenue Service (“IRS”) and potential for adjustments which could have a material impact on the Company’s results of operations for the year as a result of any IRS audit. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the timely identification and accurate measurement of provisions for tax uncertainties. Also, the evaluation of audit evidence related to the provisions for tax uncertainties required significant auditor judgment as the nature of the evidence is often subjective, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing the information used in the allocation of operating expenses of the parent company to business activities unrelated to trafficking cannabis related products; (ii) evaluating management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s assessment of both the identification of uncertain tax positions and possible outcomes of each uncertain tax position; and (iv) evaluating the status and results of tax audits with the relevant tax authorities for companies within the industry. Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained, the application of relevant tax laws, and estimated interest and penalties.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2018.

 

Costa Mesa, California

March 30, 2021

 

 
F-2

Table of Contents

    

TERRA TECH CORP. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS  

(in thousands, except shares)  

 

 

December 31,

 

December 31,

 

 

2020

 

2019

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

Cash

$

888

 

$

1,226

 

Accounts receivable, net

 

835

 

 

693

 

Short term investments

 

34,045

 

 

-

 

Inventory

 

1,602

 

 

4,334

 

Prepaid expenses and other current assets

 

234

 

 

675

 

Current assets of discontinued operations

 

2

 

 

2,440

 

 

 

 

 

 

 

 

Total current assets

 

37,606

 

 

9,368

 

 

 

 

 

 

 

 

Property, equipment and leasehold improvements, net

 

32,480

 

 

35,469

 

Intangible assets, net

 

7,714

 

 

14,871

 

Goodwill

 

6,171

 

 

21,471

 

Other assets

 

13,040

 

 

10,272

 

Investments

 

330

 

 

5,000

 

Assets of discontinued operations

 

2,953

 

 

22,799

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

100,294

 

$

119,250

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and other accrued expenses

$

8,621

 

$

9,526

 

Short-term debt

 

8,033

 

 

11,022

 

Current liabilities of discontinued operations

 

9,768

 

 

7,035

 

 

 

 

 

 

 

 

Total current liabilities

 

26,422

 

 

27,583

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

Long-term debt, net of discounts

 

6,632

 

 

6,570

 

Long-term lease liabilities

 

8,082

 

 

8,902

 

Long-term liabilities of discontinued operations

 

28

 

 

869

 

 

 

 

 

 

 

 

Total long-term liabilities

 

14,742

 

 

16,341

 

 

 

 

 

 

 

 

Total liabilities

 

41,164

 

 

43,924

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock, convertible series A, par value $0.001:

 

 

 

 

 

 

100 Shares authorized as of December 31, 2020 and 2019; 8 Shares issued as of December 31, 2020 and 2019, respectively

-

 

 

-

Preferred stock, convertible series B, par value $0.001:

 

 

 

 

-

 

41,000,000 Shares authorized as of December 31, 2020 and 2019; 0 shares issued as of December 31, 2020 and 2019, respectively

-

 

 

-

Common stock, par value $0.001:

 

 

 

 

990,000,000 Shares authorized as of December 31, 2020 and 2019; 196,512,867 shares issued and 194,204,459 shares outstanding as of December 31, 2020; 120,313,386 shares issued and 118,004,978 shares outstanding as of December 31, 2019.

218

 

 

120

Additional paid-in capital

 

275,060

 

 

260,516

 

Treasury stock

 

(808)

 

 

(808)

 

Accumulated deficit

 

(219,803)

 

 

(189,686)

 

 

 

 

 

 

 

 

Total Terra Tech Corp. stockholders’ equity

 

54,667

 

 

70,142

 

Non-controlling interest

 

4,463

 

 

5,184

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

59,130

 

 

75,326

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

100,294

 

$

119,250

 

 

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

 

 
F-3

Table of Contents

   

TERRA TECH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per-share info)

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Total revenues

 

$ 14,287

 

 

$ 16,488

 

Cost of goods sold

 

 

10,687

 

 

 

6,139

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

3,600

 

 

 

10,349

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

24,602

 

 

 

36,676

 

Impairment of assets

 

 

19,910

 

 

 

8,313

 

(Gain) / Loss on sale of assets

 

 

(35 )

 

 

(802 )

(Gain) / Loss on interest in joint venture

 

 

-

 

 

 

1,067

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(40,877 )

 

 

(34,905 )

 

 

 

 

 

 

 

 

 

Other income / (expense)

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,932 )

 

 

(9,293 )

Unrealized gain/(loss) on investments

 

 

29,045

 

 

 

-

 

Other income / (loss)

 

 

964

 

 

 

50

 

 

 

 

 

 

 

 

 

 

Total other income / (expense)

 

 

27,077

 

 

 

(9,243 )

 

 

 

 

 

 

 

 

 

Income / (loss) from continuing operations

 

 

(13,800 )

 

 

(44,148 )

Income / (loss) from discontinued operations, net of tax

 

 

(17,071 )

 

 

(3,704 )

 

 

 

 

 

 

 

 

 

NET INCOME / (LOSS)

 

 

(30,871 )

 

 

(47,852 )

 

 

 

 

 

 

 

 

 

Less: Income / (Loss) attributable to non-controlling interest from continuing operations

 

 

(754 )

 

 

(921 )

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO TERRA TECH CORP.

 

$ (30,117 )

 

$ (46,931 )

 

 

 

 

 

 

 

 

 

Income / ( Loss) from continuing operations per common share attributable to Terra Tech Corp. common stockholders – basic and diluted

 

$ (0.07 )

 

$ (0.45 )

Net Income / ( Loss) per common share attributable to Terra Tech Corp. common stockholders – basic and diluted

 

$ (0.16 )

 

$ (0.44 )

Weighted-Average Number of Common Shares Outstanding – Basic and Diluted

 

 

191,978,187

 

 

 

106,037,631

 

 

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

 

 
F-4

Table of Contents

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

(in thousands, except for Shares)

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

Series A

 

 

Common Stock

 

 

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Controlling

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Interest

 

 

Total

 

Balance at December 31, 2018

 

 

12

 

 

$ -

 

 

 

81,759,415

 

 

$ 82

 

 

$ 236,543

 

 

 

-

 

 

$ -

 

 

$ (142,755 )

 

$ 1,003

 

 

$ 94,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation - employees

 

 

-

 

 

 

-

 

 

 

740,580

 

 

 

1

 

 

 

473

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

473

 

Stock compensation - directors

 

 

-

 

 

 

-

 

 

 

173,610

 

 

 

0

 

 

 

102

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

102

 

Stock compensation - services expense

 

 

-

 

 

 

-

 

 

 

715,065

 

 

 

1

 

 

 

369

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

369

 

Stock cancellation

 

 

-

 

 

 

-

 

 

 

(60,000 )

 

 

(0 )

 

 

(58 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(58 )

Debt conversion - common stock

 

 

-

 

 

 

-

 

 

 

29,380,222

 

 

 

29

 

 

 

13,411

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,440

 

Stock issued for cash

 

 

-

 

 

 

-

 

 

 

7,604,494

 

 

 

8

 

 

 

4,492

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,500

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,342

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,342

 

Issuance of warrants to Aegis

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,978

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,978

 

Series A

 

 

(4 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Common stock repurchase

 

 

-

 

 

 

-

 

 

 

(2,308,408 )

 

 

-

 

 

 

-

 

 

 

2,308,408

 

 

 

(808 )

 

 

-

 

 

 

-

 

 

 

(808 )

Consolidation of NuLeaf joint venture

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,402

 

 

 

5,402

 

Contribution (distribution) from non-controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

703

 

 

 

703

 

Contribution (distribution) to non-controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,136 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,003 )

 

 

(6,139 )

Net loss attributable to non-controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(921 )

 

 

(921 )

Net loss attributable to Terra Tech Corp.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(46,931 )

 

 

-

 

 

 

(46,931 )

Balance at December 31, 2019

 

 

8

 

 

$ -

 

 

 

118,004,978

 

 

 

120

 

 

$ 260,516

 

 

 

2,308,412

 

 

$ (808 )

 

$ (189,686 )

 

$ 5,184

 

 

$ 75,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation - employees

 

 

-

 

 

 

-

 

 

 

3,894,544

 

 

 

4

 

 

 

515

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

519

 

Stock compensation - directors

 

 

-

 

 

 

-

 

 

 

1,359,090

 

 

 

1

 

 

 

103

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

104

 

Stock compensation - services expense

 

 

-

 

 

 

-

 

 

 

1,159,615

 

 

 

1

 

 

 

151

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

152

 

Stock cancellation

 

 

-

 

 

 

-

 

 

 

(21,924,177 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Debt conversion - common stock

 

 

-

 

 

 

-

 

 

 

31,086,209

 

 

 

31

 

 

 

2,413

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,444

 

Stock issued for cash

 

 

-

 

 

 

-

 

 

 

2,470,173

 

 

 

2

 

 

 

248

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250

 

Stock issued for OneQor acquisition

 

 

-

 

 

 

-

 

 

 

58,154,027

 

 

 

58

 

 

 

9,246

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,304

 

Stock option expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,868

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,868

 

Issuance of warrants to Aegis

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Series A

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net contribution from non-controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

33

 

 

 

33

 

Net income attributable to non-controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(754 )

 

 

(754 )

Net loss attributable to Terra Tech Corp.

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(30,117 )

 

 

-

 

 

 

(30,117 )

Balance at December 31, 2020

 

 

8

 

 

$ -

 

 

 

194,204,459

 

 

 

218

 

 

$ 275,060

 

 

 

2,308,412

 

 

$ (808 )

 

$ (219,803 )

 

$ 4,463

 

 

$ 59,130

 

 

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

 

 
F-5

Table of Contents

 

TERRA TECH CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Income (Loss)

 

$ (30,871 )

 

$ (47,852 )

Less: Income from discontinued operations

 

 

17,071

 

 

 

3,704

 

Net loss from continuing operations

 

 

(13,800 )

 

 

(44,148 )

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

 

 

 

 

 

 

 

 

Bad debt expense

 

 

650

 

 

 

2,217

 

Depreciation and amortization

 

 

6,314

 

 

 

6,396

 

Impairment loss

 

 

19,910

 

 

 

8,313

 

Gain on sale of assets

 

 

(35 )

 

 

(788 )

Amortization of operating lease right of use asset

 

 

857

 

 

 

805

 

Non-cash interest expense

 

 

1,004

 

 

 

7,880

 

Stock-based compensation

 

 

2,175

 

 

 

5,287

 

Unrealized gain on investments

 

 

(29,045 )

 

 

-

 

Loss recognized upon consolidation of equity interests

 

 

-

 

 

 

1,067

 

Other

 

 

841

 

 

 

(84 )

Change in operating assets and liabilities:

 

 

 

 

 

 

-

 

Accounts receivable

 

 

(256 )

 

 

(715 )

Inventory

 

 

2,732

 

 

 

(3,117 )

Prepaid expenses and other current assets

 

 

441

 

 

 

(56 )

Other assets

 

 

(920 )

 

 

(148 )

Accounts payable and accrued expenses

 

 

(174 )

 

 

2,464

 

Operating lease liabilities

 

 

(786 )

 

 

2,116

 

Net cash provided by / (used in) operating activities - continuing operations

 

 

(10,092 )

 

 

(12,511 )

Net cash provided by / (used in) operating activities - discontinued operations

 

 

(4,748 )

 

 

(2,229 )

NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES

 

 

(14,840 )

 

 

(14,740 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property, equipment and leasehold improvements

 

 

(1,473 )

 

 

(1,591 )

Insurance proceeds for damaged assets

 

 

452

 

 

 

-

 

Purchase of equity investment

 

 

-

 

 

 

(400 )

Issuance of note receivable

 

 

(250 )

 

 

(1,800 )

Purchase of intangible assets

 

 

-

 

 

 

-

 

Cash from acquisitions

 

 

57

 

 

 

127

 

Proceeds from sales of assets

 

 

35

 

 

 

1,249

 

Net cash provided by / (used in) investing activities - continuing operations

 

 

(1,179 )

 

 

(2,415 )

Net cash provided by / (used in) investing activities - discontinued operations

 

 

12,982

 

 

 

3,044

 

NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES

 

 

11,803

 

 

 

629

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable

 

 

2,954

 

 

 

13,000

 

Payments of debt principal

 

 

(506 )

 

 

(2,150 )

Proceeds from issuance of common stock

 

 

250

 

 

 

4,500

 

Purchase of treasury stock

 

 

-

 

 

 

(808 )

Cash paid for acquisition of non-controlling interest

 

 

-

 

 

 

(6,250 )

Cash contribution from non-controlling interest

 

 

152

 

 

 

1

 

Cash distribution to non-controlling interest

 

 

(144 )

 

 

-

 

Other

 

 

(8 )

 

 

(150 )

Net cash provided by / (used in) financing activities - continuing operations

 

 

2,698

 

 

 

8,143

 

Net cash provided by / (used in) financing activities - discontinued operations

 

 

-

 

 

 

-

 

NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES

 

 

2,698

 

 

 

8,143

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

(339 )

 

 

(5,968 )

Cash at beginning of period

 

 

1,226

 

 

 

7,194

 

 

 

 

 

 

 

 

 

 

CASH AT END OF PERIOD

 

$ 888

 

 

$ 1,226

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 1,177

 

 

$ 1,594

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Consolidation of NuLeaf net assets

 

$ -

 

 

$ 11,957

 

Financing Fees in accounts payable

 

$ -

 

 

$ 165

 

Stock issued for the acquisition of OneQor

 

$ 9,305

 

 

$ -

 

Warrants issued in conjunction with debt

 

$ -

 

 

$ 183

 

Stock issued for prior bonuses

 

$ 469

 

 

$ -

 

Fixed assets in accounts payable

 

$ 484

 

 

$ -

 

Non-cash contributions from non-controlling interest

 

$ -

 

 

$ 702

 

Debt principal and interest converted to common stock

 

$ 2,444

 

 

$ 13,200

 

Beneficial conversion feature recorded for Dominion debt

 

$ -

 

 

$ 5,795

 

 

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

 

 
F-6

Table of Contents

   

TERRA TECH CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Organization

 

References in this document to “the Company”, “Terra Tech”, “we”, “us”, or “our” are intended to mean Terra Tech Corp., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.

 

Terra Tech is a holding company with the following subsidiaries:

 

620 Dyer LLC, a California corporation (“Dyer”);

1815 Carnegie LLC, a California limited liability company (“Carnegie”);

Black Oak Gallery, a California corporation (“Black Oak”);

Blüm San Leandro, a California corporation (“Blüm San Leandro”);

GrowOp Technology Ltd., a Nevada corporation (“GrowOp Technology”);

IVXX, Inc., a California corporation (“IVXX Inc.”; together with IVXX LLC, “IVXX”);

IVXX, LLC, a Nevada limited liability company (“IVXX LLC”);

MediFarm, LLC, a Nevada limited liability company (“MediFarm”);

MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”);

MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”); and

MediFarm So Cal, Inc., a California corporation (“MediFarm SoCal”)

121 North Fourth Street, LLC, a Nevada limited liability company ("121 North Fourth")

OneQor Technologies, Inc., a Delaware corporation ("OneQor")

 

The Company is a retail, production and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. We currently have a concentrated cannabis interest in California. All of the Company’s cannabis dispensaries operate under the name Blüm. The Company’s cannabis dispensaries in California operate as Black Oak Gallery in Oakland and Blum San Leandro in San Leandro and offer a broad selection of medical and adult-use cannabis products including flowers, concentrates and edibles.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Securities Exchange Commission (“SEC”) Form 10-K and Regulation S-X and reflect the accounts and operations of the Company and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of FASB or ASC 810, “Consolidation”, we consolidate any variable interest entity (“VIE”), of which we are the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We evaluate our relationships with all the VIEs on an ongoing basis to reassess if we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of operations and cash flows for the years ended December 31, 2020 and 2019 have been included.

 

 
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Table of Contents

 

Going Concern

 

The accompanying financial statements have been prepared assuming that we will continue as a going concern. The risks and uncertainties on the future of our business due to COVID-19 and regulatory uncertainty, combined with the fact that we have historically lost money, have in the past, raised substantial doubt as to our ability to continue as a going concern. However, management feels that proceeds due from its Hydrofarm investment, proceeds from the Nevada asset sales, management’s past and on-going efforts to trim costs and management’s recent efforts to boost sales will lead to cash sustainability. Therefore management feels that there is no material uncertainty as to the Company’s ability to continue as a going concern.

 

Non-Controlling Interest

 

Non-controlling interest is shown as a component of stockholders’ equity on the consolidated balance sheets and the share of income (loss) attributable to non-controlling interest is shown as a component of income (loss) in the consolidated statements of operations.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, investments, deferred income tax asset valuation allowances, uncertain tax positions, and litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not affect net loss, revenues and stockholders’ equity. See Note 19, “Discontinued Operations” for further discussion regarding discontinued operations.

 

Trade and other Receivables

 

The Company extends non-interest bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The reserve for doubtful accounts was zero and $0.44 million as of December 31, 2020 and 2019, respectively.

 

Investments

 

Investments in unconsolidated affiliates are accounted for under the cost or the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5% of the investee’s outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid. As investments accounted for under the cost method do not have readily determinable fair values, the Company only estimates fair value if there are identified events or changes in circumstances that could have a significant adverse effect on the investment’s fair value.

 

Publicly held equity securities are recorded at fair value with unrealized gains or losses resulting from changes in fair value reflected as unrealized gains or losses on equity securities in our consolidated statements of operations.

 

 
F-8

Table of Contents

  

Inventory

 

Inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods.

 

Prepaid Expenses and Other Current Assets

 

Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include advertising, insurance, and service or other contracts requiring up-front payments.

 

Property, Equipment and Leasehold Improvements, Net

 

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The approximate useful lives for depreciation of our property, equipment and leasehold improvements are as follows: thirty-two years for buildings; three to eight years for furniture and equipment; three to five years for computer and software; five years for vehicles and the shorter of the estimated useful life or the underlying lease term for leasehold improvements. Repairs and maintenance expenditures that do not extend the useful lives of related assets are expensed as incurred.

 

Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See Note 7, “Property, Equipment and Leasehold Improvements, Net” for further information.

 

Intangible Assets

 

Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. The approximate useful lives for amortization of our intangible assets are as follows:

 

Customer Relationships

 

3 to 5 Years

 

Trademarks

 

2 to 8 Years

 

Dispensary Licenses

 

14 Years

 

 

 
F-9

Table of Contents

 

The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.

 

Intangible assets that have indefinite useful lives are tested annually for impairment, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair value.

 

Goodwill

 

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350, “Intangibles-Goodwill and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.

 

The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually as of September 30 and whenever events or changes in circumstances indicate carrying amount may not be recoverable. In the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit.

 

The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.

 

If the carrying amount of a reporting unit is in excess or its fair value, the Company recognizes an impairment charge equal to the amount in excess.

 

Notes Receivable

 

The Company reviews all outstanding notes receivable for collectability as information becomes available pertaining to the Company’s inability to collect. An allowance for notes receivable is recorded for the likelihood of non-collectability. The Company accrues interest on notes receivable based net realizable value. The allowance for uncollectible notes was zero and $1.83 million as of December 31, 2020 and 2019, respectively.

 

Assets Held for Sale and Discontinued Operations

 

Assets held for sale represent furniture, equipment, and leasehold improvements less accumulated depreciation as well as any other assets that are held for sale in conjunction with the sale of a business. The Company records assets held for sale in accordance with ASC 360, “Property, Plant, and Equipment,” at the lower of carrying value or fair value less costs to sell. Fair value is based on the estimated proceeds from the sale of the facility utilizing recent purchase offers, market comparables and/or data. Our estimate as to fair value is regularly reviewed and subject to changes in the commercial real estate markets and our continuing evaluation as to the facility’s acceptable sale price. The reclassification takes place when the assets are available for immediate sale and the sale is highly probable. These conditions are usually met from the date on which a letter of intent or agreement to sell is ready for signing. The Company follows the guidance within ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity” when assets held for sale represent a strategic shift in the Company’s operations and financial results.

 

 
F-10

Table of Contents

 

Fair Value of Financial Instruments, Non-Financial Instruments and Derivative Assets

 

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

 

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

 

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

 

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

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.

 

The following table presents the Company’s financial instruments that are measured and recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2020:

 

Investments:

 

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Warrants to acquire shares of HydroFarm

 

$ 10,195

 

 

$ -

 

 

$ 10,195

 

 

$ -

 

Shares in HydroFarm

 

 

23,850

 

 

 

-

 

 

 

23,850

 

 

 

-

 

Option to acquire Edible Garden Inc

 

 

330

 

 

 

-

 

 

 

-

 

 

 

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$ 34,375

 

 

$ -

 

 

$ 34,045

 

 

$ 330

 

  

Business Combinations

 

The Company accounts for its business acquisitions in accordance with ASC 805-10, “Business Combinations.” The Company allocates the total cost of the acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, the Company identifies and attributes values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models, and therefore require considerable judgment. The Company’s estimates and assumptions are based, in part, on the availability of listed market prices or other transparent market data. These determinations affect the amount of amortization expense recognized in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain.

 

 
F-11

Table of Contents

 

Revenue Recognition and Performance Obligations

 

The Company recognizes revenue from manufacturing and distribution product sales when our customers obtain control of our products. Revenue from our retail dispensaries is recorded at the time customers take possession of the product. Revenue from our retail dispensaries is recognized net of discounts, promotional adjustments and returns. We collect taxes on certain revenue transactions to be remitted to governmental authorities, which may include sales, excise and local taxes. These taxes are not included in the transaction price and are, therefore, excluded from revenue. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.

 

Revenue related to distribution customers is recorded when the customer is determined to have taken control of the product. This determination is based on the customer specific terms of the arrangement and gives consideration to factors including, but not limited to, whether the customer has an unconditional obligation to pay, whether a time period or event is specified in the arrangement and whether the Company can mandate the return or transfer of the products. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with collected taxes recorded as current liabilities until remitted to the relevant government authority.

 

Disaggregation of Revenue

 

See Note 20, “Segment Information” for revenues disaggregated by type as required by ASC Topic 606. The company believes this level of disaggregation sufficiently depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. The table below shows the revenue break between California operations and Nevada operations for the years ended December 31, 2020 and 2019.

 

 

 

(in thousands)

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

California

 

$ 6,161

 

 

$ 12,413

 

Nevada

 

 

8,126

 

 

 

4,075

 

Total

 

$ 14,287

 

 

$ 16,488

 

   

Contract Balances

 

Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC Topic 606.

 

Contract Estimates and Judgments

 

The Company’s revenues accounted for under ASC Topic 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

 

Cost of Goods Sold

 

Cannabis Dispensary, Cultivation and Production

 

Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and delivery costs. It also includes the labor and overhead costs incurred in cultivating and producing cannabis flower and cannabis-derived products. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.

 

Advertising Expenses

 

The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising expenses from continuing operations totaled $0.19 million and $1.49 million in the years ended December 31, 2020 and 2019, respectively.

 

Stock-Based Compensation

 

The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors, including restricted stock awards. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The fair value of restricted stock awards is based upon the quoted market price of the common shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.

 

 
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Table of Contents

 

The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. The Company accounts for forfeitures of stock-based awards as they occur.

 

Income Taxes

 

The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At December 31, 2020 and 2019, such net operating losses were offset entirely by a valuation allowance.

 

The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.

 

Loss Per Common Share

 

In accordance with the provisions of ASC 260, “Earnings Per Share,” net loss per share is computed by dividing net loss by the weighted-average shares of common stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock, and convertible debt are not considered in the diluted loss per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the years ended December 31, 2020 and 2019. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for all years.

 

Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent shares):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Common stock warrants

 

 

1,076,555

 

 

 

1,313,459

 

Common stock options

 

 

17,492,830

 

 

 

12,365,295

 

 

 

 

 

 

 

 

 

 

 

 

 

18,569,385

 

 

 

13,678,754

 

 

 
F-13

Table of Contents

   

Recently Adopted Accounting Standards

 

FASB Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments” - Issued in June 2016, ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The Company adopted the standard January 1, 2020. Adoption had no material impact on the Company’s financial position or results of operations.

 

Recently Issued Accounting Standards

 

FASB ASU No. 2020-06 “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” - Issued in August 2020, ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and the interest rate on convertible debt instruments will typically be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company is currently evaluating the adoption date and impact adoption will have on its financial position and results of operations.

 

FASB ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” - Issued in December 2019, ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.

 

NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash balances in several financial institutions that are insured by either the Federal Deposit Insurance Corporation or the National Credit Union Association up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations and it maintains significant cash on hand at certain of its locations. The Company has not historically experienced any material loss from carrying cash on hand. The amount in excess of insured limitations was $0.06 million and $0.18 million as of December 31, 2020 and 2019, respectively.

 

The Company provides credit in the normal course of business to its customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10.0% of the Company’s revenue for the year ended December 31, 2020 and 2019.

 

The Company sources cannabis products for retail, cultivation and production from various vendors. However, as a result of the new regulations in the State of California, the Company’s California retail, cultivation and production operations must use vendors licensed by the State effective January 1, 2018. As a result, we are dependent upon the licensed vendors in California to supply products as of that date. If the Company is unable to enter into a relationship with sufficient members of properly licensed vendors, the Company’s sales may be impacted. During the year ended December 31, 2020 and 2019, we did not have any concentration of vendors for inventory purchases. However, this may change depending on the number of vendors who receive appropriate licenses to operate in the State of California.

 

NOTE 4 – VARIABLE INTEREST ENTITY ARRANGEMENTS

 

NuLeaf, Inc.

 

On October 26, 2017, the Company entered into operating agreements with NuLeaf, Inc. and formed NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (collectively “NuLeaf”) to build and operate cultivation and production facilities of cannabis products in Nevada. The agreements were subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. Under the terms of the agreements, the Company remitted to NuLeaf an upfront investment of $4.50 million in the form of convertible loans bearing an interest rate of 6% per annum. On June 28, 2018, the Company received approval from the State of Nevada. The remaining required approvals from local authorities were received in July 2018. As a result, the notes receivable balance was converted into a 50% ownership interest in NuLeaf. The investment in NuLeaf was initially recorded at cost and accounted for using the equity method.

 

 
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Table of Contents

 

In February 2019, we amended and restated the NuLeaf agreements and obtained control of the operations of NuLeaf. The Company has determined these entities are variable interest entities in which the Company is the primary beneficiary by reference to the power and benefits criterion under ASC 810, “Consolidation.” The provisions within the amended agreement granted the Company the power to manage and make decisions that affect the operation of these entities. As the primary beneficiary of NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC, the Company began consolidating the accounts and operations of these entities on March 1, 2019. All intercompany transactions are eliminated in the unaudited consolidated financial statements. Effective March 1, 2019, we remeasured our equity method investment in NuLeaf to fair value and consolidated the results of NuLeaf within our consolidated financial statements.

 

Revenue and net loss attributed to NuLeaf is $8.13 million and $4.08 million, respectively, for the year ended December 31, 2020. The aggregate carrying values of Sparks Cultivation, LLC and NuLeaf Reno Production, LLC assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows:

 

 

 

(in thousands)

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Current assets:

 

 

 

 

 

 

Cash

 

$ 671

 

 

$ 243

 

Accounts receivable, net

 

 

483

 

 

 

16

 

Inventory

 

 

3,118

 

 

 

2,910

 

Prepaid expenses and other current assets

 

 

21

 

 

 

35

 

Total current assets

 

 

4,293

 

 

 

3,204

 

 

 

 

 

 

 

 

 

 

Property, equipment and leasehold improvements, net

 

 

7,442

 

 

 

9,543

 

Other assets

 

 

395

 

 

 

598

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 12,130

 

 

$ 13,345

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Total current liabilities

 

$ 396

 

 

$ 213

 

Total long-term liabilities

 

 

307

 

 

 

415

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

$ 703

 

 

$ 628

 

 

NOTE 5 – INVESTMENTS IN UNCONSOLIDATED AFFILIATES

 

Hydrofarm

 

On August 28, 2018, the Company entered into a Subscription Agreement with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), one of the leading independent providers of hydroponic products in North America, pursuant to which the Company agreed to purchase from Hydrofarm and Hydrofarm agreed to sell to the Company 2,000,000 “Units”, each Unit consisting of one share of common stock and one warrant to purchase one-half of a share of common stock for an initial exercise price of $5.00 per share, for $2.50 per Unit for an aggregate purchase price of $5.00 million. The investment in Hydrofarm was recorded at cost and was included in other assets on the consolidated balance sheet as of December 31, 2019.

 

 
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Table of Contents

 

On November 24, 2020, Hydrofarm’s board of directors and stockholders approved an amendment to their amended and restated certificate of incorporation effecting a 1-for-3.3712 reverse stock split of their issued and outstanding shares of common stock. Subsequent to the reverse split, the Company owned 593,261 shares of common stock in Hydrofarm, with an exercise price at $8.43 per share, and 296,630 warrants to purchase one share of common stock, with an exercise price of $16.86 per share.

 

On December 14, 2020, Hydrofarm announced the closing of its initial public offering; shares of Hydrofarm began trading on the Nasdaq Global Select Market under the ticker symbol “HYFM.” Hydrofarm’s common shares outstanding on the closing date were 31,720,727; the Company’s ownership percentage in Hydrofarm was approximately 1.9%.

 

Upon closing of Hydrofarm’s initial public offering, the Company determined that the investment in Hydrofarm no longer qualifies to be stated at cost, as the equity security has a readily determinable value and therefore should be recorded at fair value. In the fourth quarter of 2020, the Company recorded its investment in Hydrofarm of 593,261 common shares at fair value, and the warrants to acquire an additional 296,630 of Hydrofarm common stock at an exercise price of $16.86, at their respective fair values. The difference in basis was recorded in current period earnings.

   

NOTE 6 – INVENTORY

 

Raw materials consists of material for NuLeaf and IVXX’s lines of cannabis pure concentrates. Work-in-progress consists of cultivation materials and live plants grown at NuLeaf and Black Oak Gallery. Finished goods consists of cannabis products sold in retail.

 

Inventory as of December 31, 2020 and 2019 consisted of the following:

   

 

 

(in thousands)

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Raw materials

 

$ 39

 

 

$ 2,400

 

Work-in-progress

 

 

1,196

 

 

 

2,677

 

Finished goods

 

 

367

 

 

 

275

 

Inventory reserve

 

 

-

 

 

 

(1,018 )

 

 

 

 

 

 

 

 

 

Total inventory

 

$ 1,602

 

 

$ 4,334

 

  

 
F-16

Table of Contents

   

NOTE 7 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

 

Property, equipment, and leasehold improvements, net consists of the following:

  

 

 

(in thousands)

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Land and building

 

$ 11,206

 

 

$ 11,206

 

Furniture and equipment

 

 

2,913

 

 

 

2,787

 

Computer hardware

 

 

215

 

 

 

299

 

Leasehold improvements

 

 

16,459

 

 

 

16,545

 

Construction in progress

 

 

9,922

 

 

 

9,676

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

40,715

 

 

 

40,513

 

Less accumulated depreciation

 

 

(8,235 )

 

 

(5,044 )

Property, equipment and leasehold improvements, net

 

 

 

 

 

 

 

 

 

 

$ 32,480

 

 

$ 35,469

 

  

Depreciation expense related to property, equipment and leasehold improvements for the years ended December 31, 2020 and 2019 was $3.77 million and $3.38 million, respectively.

 

Assets Divested

 

Blum Santa Ana

 

On February 26, 2020, the Company agreed to transfer governance and control of our dispensary operation located at 2911 Tech Center Drive, Santa Ana, CA to Martin Vivero and Tetra House Co. (“Tetra”), who are unaffiliated third parties. The Company received $2.00 million at closing and $1.45 million during the 3rd Quarter of 2020 in exchange for these assets. MediFarm So Cal Inc. (“MediFarm So Cal”), a wholly-owned subsidiary of the Company, terminated the existing management services agreement with 55 OC Community Collective Inc. (“55 OC”). 55 OC is a mutual benefit corporation which holds a cannabis license with the City of Santa Ana in the State of California. Previously, MediFarm So Cal managed the dispensary known as “Blum Santa Ana” under the license of 55 OC. Control of 55 OC was transferred to Mr. Vivero and Tetra House Co. via a new management services agreement and the appointment of Mr. Vivero to the Board of Directors of 55 OC, which was pending final regulatory approval as of the date of our report.

 

The Company recognized a loss upon sale of the assets equal to the difference between the consideration paid and the book value of the assets as of the disposition date, less direct costs to sell, and reflected such loss in discontinued operations.

 

 
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Table of Contents

 

The following table summarizes the transaction:

  

 

 

(in thousands)

 

Total consideration

 

$ 3,800

 

 

 

 

 

 

Net book value of assets divested and liabilities transferred

 

 

 

 

Inventory

 

 

23

 

Prepaid and other current assets

 

 

33

 

Property, plant & equipment

 

 

98

 

Intangible assets and goodwill

 

 

6,565

 

Other long-term assets

 

 

54

 

Lease liability, net of right-of-use asset

 

 

(78 )

Net book value of assets divested and liabilities transferred

 

 

6,694

 

Loss on sale

 

$ (2,894 )

   

Edible Garden

 

On March 30, 2020, Edible Garden Corp. (“Edible Garden”), a wholly-owned subsidiary of Terra Tech Corp. (the “Company”), entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with Edible Garden Incorporated (the “Purchaser”), pursuant to which Edible Garden sold and the Purchaser purchased substantially all of the assets of Edible Garden (the “Business”). The consideration paid for the Business included a five-year $3.00 million secured promissory note bearing interest at 3.5% per annum, which is reflected within the assets under discontinued operations, and two option agreements to purchase up to a 20% interest in the Purchaser for a nominal fee. The first option gives the Company the right to purchase a 10% interest in the Purchaser for one dollar at any time between the one and five-year anniversary of the transaction, or at any time should a change in control event or public offering occur. The second option gives the Company the right to purchase an additional 10% interest in the Purchaser for one dollar at any point prior to the five-year anniversary of the transaction. The second option is automatically terminated upon payment in full of the $3.00 million secured promissory note.

 

Michael James, the Company’s former Chief Financial Officer, is a principal of the Purchaser. There is no material relationship between the Company or its affiliates and the Purchaser other than as set forth in the previous sentence. The Purchase Agreement contains customary conditions, representations, warranties, indemnities and covenants by, among, and for the benefit of the parties.

 

The Company recognized a loss upon sale of the assets equal to the difference between the consideration paid and the book value of the assets as of the disposition date and reflected such loss in discontinued operations. The following table summarizes the transaction:

 

 
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Table of Contents

 

 

 

(in thousands)

 

Consideration

 

 

 

Fair value of note receivable

 

$ 2,960

 

Fair value of options

 

 

330

 

Less: cash transferred to purchaser

 

 

(30 )

Total consideration

 

$ 3,260

 

 

 

 

 

 

Net book value of assets divested and liabilities transferred

 

 

 

 

Accounts receivable

 

$ 360

 

Inventory

 

 

520

 

Other current assets

 

 

80

 

Property, plant and equipment

 

 

4,100

 

Intangible assets

 

 

70

 

Other long-term assets

 

 

200

 

Accounts payable and accrued expenses

 

 

(1,700 )

Lease liabilities, net of right of use assets

 

 

(70 )

Net book value of assets divested and liabilities transferred

 

 

3,560

 

Loss on sale

 

$ (300 )

   

Carnegie

 

On July 30, 2020, 1815 Carnegie LLC completed a transaction to sell real property in Santa Ana, CA to Dyer 18 LLC, an unaffiliated third party, for total cash consideration of $8.20 million and a gain of $1.2 million.

  

NOTE 8 – INTANGIBLE ASSETS AND GOODWILL

 

Goodwill

 

Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities.

 

Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the last day of the third quarter, or more frequently under certain circumstances. For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment (“step one”) where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31, 2020 and 2019 was $6.17 million and $21.47 million, respectively and was attributed to the Cannabis reportable segment.

 

 
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Table of Contents

 

The table below summarizes the changes in the carrying amount of goodwill:

 

Balance at December 31, 2018

 

$ 28,921

 

Impairment

 

 

(7,450 )

Balance at December 31, 2019

 

 

21,471

 

Impairment

 

 

(15,300 )

Balance at December 31, 2020

 

$ 6,171

 

   

The Company tests for impairment annually on September 30, and between annual tests if the Company becomes aware of an event or a change in circumstances that would indicate the carrying value may be impaired. During the first quarter of 2020, the impact of COVID-19 on the retail industry as well as uncertainty around when the Company would be able to resume its normal operations contributed to a significant and prolonged decline in the Company’s stock price, resulting in the market capitalization of the Company falling below its carrying value. As a result, management determined that a triggering event had occurred as it was more likely than not that the carrying values of the Black Oak Gallery reporting unit exceeded its fair value. Accordingly, the Company performed a quantitative assessment of the fair value of Black Oak Gallery’s goodwill as of March 31, 2020 using a market capitalization approach. This analysis resulted in an impairment charge of $4.20 million recorded in the first quarter of 2020. The goodwill impairment charge was measured as the amount by which the carrying amount of the reporting unit, including goodwill, exceeded its fair value.

 

During the second quarter of 2020, COVID-19 and civil unrest in Oakland, California continued to have a material negative impact on the financial results of the Black Oak Gallery reporting unit. As a result, management determined that a triggering event had occurred as it was more likely than not the carrying value Black Oak Gallery’s goodwill exceeded its fair value. Accordingly, the Company performed a quantitative assessment of the fair value of Black Oak Gallery’s goodwill as of June 30, 2020 using an income approach. The analysis resulted in an impairment charge of $2.75 million recorded in the second quarter of 2020. The goodwill impairment charge was measured as the amount by which the carrying amount of the reporting unit, including goodwill, exceeded its fair value.

 

During the third quarter of 2020, COVID-19 and the aftermath of civil unrest in Oakland, California continued to have a material negative impact on the financial results of the Black Oak Gallery reporting unit. The Company completed its annual testing for impairment as of September 30, 2020 using the Guideline Public Company method. The results of the step one assessment indicated the carrying value of the reporting unit exceeded the fair value by $8.35 million as of September 30, 2020. As a result, the Company recognized an impairment charge of $8.35 million during the third quarter of 2020.

 

During the fourth quarter of 2020, Black Oak’s dispensary reopened and revenue climbed to levels seen in Q2, before the store was forced to close for repairs due to the rioting/civil unrest. There were no significant one-time events that took place in Q4 or significant fluctuations in financial metrics. The Company’s overall market capitalization increased from $14.8M to $29.68M.  The overall outlook for the cannabis industry also improved during the fourth quarter of 2020, largely due to the election results (Joe Biden pledged to decriminalize marijuana at a federal level).  Management assessed all intangible assets (definite-lived and indefinite-lived) and investments for potential impairment and concluded that there were no indications of impairment in the fourth quarter of 2020.

 

The impairment charges relating to goodwill and other assets are presented in the “Impairment of Assets” line in the Consolidated Statements of Operations.

 

 
F-20

Table of Contents

 

Intangible Assets Net

 

Intangible assets consisted of the following as of December 31, 2020 and 2019:

 

 

 

(in Thousands)

 

 

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

Estimated Useful Life

in Years

 

 

Gross

Carrying Amount

 

 

Accumulated Amortization

 

 

Net

Carrying Amount

 

 

Gross

Carrying

Value

 

 

Accumulated Amortization

 

 

Net

Carrying

Value

 

Amortizing Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

 

3 to 5

 

 

$ 7,400

 

 

$ (7,400 )

 

$ -

 

 

$ 7,860

 

 

$ (5,608 )

 

$ 2,252

 

Trademarks and Patent

 

2 to 8

 

 

 

196

 

 

 

(187 )

 

 

9

 

 

 

196

 

 

 

(166 )

 

 

30

 

Dispensary Licenses

 

14

 

 

 

10,270

 

 

 

(3,485 )

 

 

6,785

 

 

 

10,270

 

 

 

(2,751 )

 

 

7,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Amortizing Intangible Assets

 

 

 

 

 

 

17,866

 

 

 

(11,072 )

 

 

6,794

 

 

 

18,326

 

 

 

(8,525 )

 

 

9,801

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Amortizing Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade Name

 

Indefinite

 

 

 

920

 

 

 

-

 

 

 

920

 

 

 

5,070

 

 

 

-

 

 

 

5,070