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TRTC > SEC Filings for TRTC > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for TERRA TECH CORP.

Form 10-K for TERRA TECH CORP.


31-Mar-2014

Annual Report


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

OVERVIEW

We were incorporated as Private Secretary, Inc. on July 22, 2008 in the State of Nevada. From inception until we completed our reverse acquisition of GrowOp Technology, the principal business of the Company originally was to develop a software program that would allow for automatic call processing through VoIP technology. On January 27, 2012, the Company filed an amendment to its Articles of Incorporation changing its name to Terra Tech Corp. During that time, we had no revenue and our operations were limited to capital formation, organization, and development of our business plan and target customer market. As a result of the merger with GrowOp Technology, on February 9, 2012 we ceased our prior operations and we are now a holding company and our wholly owned subsidiary engages in the design, marketing and sale of hydroponic equipment with proprietary technology to create sustainable solutions for the cultivation of indoor agriculture.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Registration Statement on Form 10-K. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.


Overview and 2013 Highlights

We were incorporated as Private Secretary, Inc. on July 22, 2008 in the State of Nevada. From inception until we completed our reverse acquisition of GrowOp Technology, the principal business of the Company originally was to develop a software program that would allow for automatic call processing through VoIP technology. On January 27, 2012, the Company filed an amendment to its Articles of Incorporation changing its name to Terra Tech Corp. During that time, we had no revenue and our operations were limited to capital formation, organization, and development of our business plan and target customer market. As a result of the merger with GrowOp Technology, on February 9, 2012 we ceased our prior operations and we are now a holding company and our wholly owned subsidiary engages in the design, marketing and sale of hydroponic equipment with proprietary technology to create sustainable solutions for the cultivation of indoor agriculture.

On February 9, 2012, Terra Tech Corp. (formerly named, "Private Secretary, Inc."), a Nevada corporation (the "Company") entered into an Agreement and Plan of Merger dated February 9, 2012 (the "Agreement and Plan of Merger"), by and among the Company, TT Acquisitions, Inc., a Nevada corporation and a wholly-owned subsidiary of the Company ("TT Acquisitions"), and GrowOp Technology Ltd., a Nevada corporation ("GrowOp Technology").

Under the terms and conditions of the Agreement and Plan of Merger, the Company sold 33,998,500 shares of common stock of the Company in consideration for all the issued and outstanding shares in GrowOp Technology. The effect of the issuance is that GrowOp Technology shareholders now hold approximately 41.46% of the issued and outstanding shares of common stock of the Company. Separately, TT Acquisitions merged with GrowOp Technology, with the effect that GrowOp Technology is a wholly-owned subsidiary of the Company. Articles of Merger, effecting the merger of GrowOp Technology and TT Acquisitions, were filed with the Secretary of State of the State of Nevada on February 9, 2012.

GrowOp Technology was founded in March 2010, in Oakland, California. GrowOp Technology's business (now the principal business of Terra Tech) is the integration of best of breed hydroponic equipment with proprietary technology to create sustainable solutions for the cultivation of indoor agriculture. We work closely with expert horticulturists, engineers, and scientists, to develop and manufacture advanced proprietary products for the hydroponic industry. Our products are utilized by horticulture enthusiasts, local urban farmers, and green house growers. We believe that the emerging trend of urban and indoor agriculture has fostered an entrepreneurial push by companies to bring their concept to market. Many of these companies lack both the intellectual resources and manufacturing capabilities to bring their idea to fruition. That is where Terra Tech is positioned. We have the team and the resources to help bring indoor cultivation designs from concept to production. Our products can be found through specialty retailers throughout the United States.

In addition to cultivation equipment the company acquired Edible Garden Corp in April of 2013. Edible Garden cultivates and distributes a line of hydroponic and soil grown produce, which is currently distributed to over 600 retail stores throughout the Northeast, Midwest and Florida markets. The company began construction of a new 5-acre hydroponic cultivation facility in early 2013. A majority of the capital raised throughout 2013 was utilized to finish the construction of this facility. Throughout 2013 the company contracted with NB Plants to cultivate their line of produce while they were waiting for the completion of their new greenhouse. Although we produced significantly higher revenue during the year, we still experienced significant early-stage higher per unit costs inefficiencies during the production ramp from April to December as a result of lower fixed cost absorption, cultivation inefficiencies associated with the initial production ramp and higher logistics costs as our supply chain processes continued to mature.

Marketing and Distribution Agreements

On May 7, 2013, Edible Garden Corp., a Nevada corporation and wholly-owned subsidiary of Terra Tech Corp., a Nevada corporation (the "Company"), entered into a letter agreement with Gro-Rite Inc., a New Jersey corporation ("Gro-Rite") whereby Edible Garden has the right to purchase and distribute a majority of Gro-Rite's plant products from Gro-Rite for marketing, sale and distribution. Under the agreement, Edible Garden will receive a sales commission of up to 10% of the selling price of plants sold.

On May 7, 2013, Edible Garden Corp. entered into a letter agreement with NB Plants LLC, a New Jersey limited liability company ("NB Plants"), whereby Edible Garden has the right to purchase and distribute a majority of NB Plants's plant products from NB Plants for marketing, sale and distribution. Under the agreement, Edible Garden will receive a sales commission of 10% of the selling price of plants sold.


Both Gro-Rite and NB Plants are companies affiliated with Ken VandeVrede, Mike VandeVrede, Steve VandeVrede and Dan VandeVrede, all of whom are affiliates of the Company. Additionally, Ken VandeVrede, Mike VandeVrede, Steve VandeVrede are all directors of the Company.

Management Opportunities, Challenges and Risks

Our principal focus in 2013 was on the construction of the new 5-acre cultivation facility, rebranding and designing our new product line and contracted with farms throughout the country to cultivate the Edible Garden brand under our conditions and standards. We successfully commenced the rebranding of our product line and contracting new farms during the second quarter 2013 however, during the second half of 2013 our focus switched to accelerating the construction of the new 5-acre facility. A significant portion of the company's time, resources and energy went into financing and completing the project at the expense of furthering our sales efforts.

Having completed the majority of our new facility in 2013, we expect produce sales to increase significantly in 2014 as compared with 2013.

Liquidity and Capital Resources

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

Results of Operations for the year ended December 31, 2013 compared to the year ended December 31, 2012:

Total revenues generated for the year ended December 31, 2013 totaled $2,125,851 an increase of 285% from the year ended December 31, 2012 which totaled $552,579. The increase was primarily due to the company's acquisition of Edible Garden Corp in April 2013 and the continued sales expansion of the Company's produce line. At this stage in the Company's development, revenues are not yet sufficient to cover ongoing operating expenses. Gross profits for the year ended December 31, 2013 amounted to $88,918 for a 4% gross margin. Gross profits decreased $11,948 or 12% for the year ended December 31, 2013 compared to $100,866 for the year ended December 31, 2012 with an 18% gross profit margin in 2012. The decrease in gross profits and gross margin is a result of higher revenue from the sale of locally grown hydroponic produce.

Selling, general and administrative expenses of $3,575,898, which included $1,355,990 in non-cash outlays in the form of restricted stock and warrants issued as part of the units to raise capital, the Company realized an operating loss of $3,486,980. Operating losses for 2013 of $3,486,980 were down $2,284,985 or 40% as compared to the 2012 operating loss of $5,771,965. The overall decrease of $4,799,965 was due to the impairment of goodwill in 2012. The balance was offset by approximately $1,220,590 from the increase in warrants issued due to the capital raises in 2013. Consulting expenses increased $738,902 due to more consultants being hired in 2013 in association with the new locally grown hydroponic produce business. In 2013 there was a write-off of obsolete inventory in the amount of $417,667 versus zero in 2012. Professional fees increased $90,192 in 2013 versus 2012 due to the additional filings made to register the Company's common stock.

Other income and expense, net totaled $2,659,721 for the year ended December 31, 2013 an increase of 4087% or $2,596,196 as compared to $63,525 for the year ended December 31, 2012. In 2013 there was a loss from derivatives issued with debt greater than the debt carrying value in the amount of $2,054,000 versus zero in 2012. There was a gain on the fair market valuation of the derivatives in the amount of $673,000 versus zero in 2012. Interest and financing expense was $1,278,721 in 2013 increased by $1,216,518 from $62,203 in 2012 due to the addition debt issued in 2013.

The net result for the year ended December 31, 2013 was a loss of $6,148,351 or $0.06 per share, compared to a loss of $5,836,369 or $0.08 per share for the prior year. Management will continue to make an effort to lower operating expenses and increase revenue. The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character management expects them to significantly decrease as a percentage of revenues as revenues increase.


Since our inception, we have raised capital through the private sale of preferred stock and debt securities, private sales of common stock. The Company's business operations generally have been financed by debt investments through the sale of 6% Senior Secured Convertible Debentures with accredited investors and equity investments in the common stock of the Company by accredited investors. During the full year of 2013, the Company obtained new debt from the issuance of 6% Senior Secured Convertible Debentures that supplied the funds that were needed to finance operations during the reporting period. The stated rate of interest is 6% while the inputted rate is 60% when giving effect for the conversion feature. Such new borrowings resulted in the receipt by the Company of $1,757,474. In addition, related parties contributed $17,502 in exchange for an unsecured non-convertible note payable. All debt investments are current and in good standing

At December 31, 2013, we had cash of approximately $26,943 and a working capital deficit of $3,713,641. Our major cash flows in the year ended December 31, 2013 consisted of cash out-flows of $3,853,587 from operations, including $6,148,350 of net loss, cash outflows of $11,300 from investing activities and a net change from financing activities of $3,875,518, which primarily represented the net proceeds received from issuance of debt, common stock and warrants. We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the first quarter of 2014. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including loans and sale of common stock.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have raised capital through the private sale of preferred stock and debt securities, private sales of common stock. At December 31, 2013, we had cash of approximately $26,943 and a working capital deficit of $3,713,641. Our major cash flows in the year ended December 31, 2013 consisted of cash out-flows of $3,853,587 from operations, including $6,148,350 of net loss, cash outflows of $11,300 from investing activities and a net change from financing activities of $3,875,518, which primarily represented the net proceeds received from issuance of debt, common stock and warrants. We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the first quarter of 2014. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including loans and sale of common stock.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

Use of Estimates

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


Fair Value of Financial Instruments

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which 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.

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

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

Accounts Receivable

The Company reviews all outstanding accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable. The Company does not accrue interest receivable on past due accounts receivable. As of December 31, 2012 there was a reserve of $85,576 against the collection of accounts receivable.

Prepaid Inventory

Prepaid inventory represents deposits made to foreign manufacturers for purchase orders of specific inventory.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets: 3-8 years for machinery and equipment, leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.


Revenue Recognition

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

Cost of Goods Sold

Management decided to change the focus of the business in 2011 to designing, manufacturing and selling hydroponic equipment where favorable gross margins are achieved.

Research and Development

Research and development costs are expensed as incurred.

Income Taxes

The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company's 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. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the twelve months ended December 31, 2012.

Loss Per Common Share

Net loss per share, in accordance with the provisions of ASC 260, "Earnings Per Share" is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the twelve months ended December 31, 2012 therefore the basic and diluted weighted average common shares outstanding were the same.

Recently Issued Accounting Standards

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

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