Each stock appreciates in value for a variety of reasons, some of which include strong management, a growing industry or fundamental valuation. In this report, I will get to the bottom of each of these themes and how Terra Tech (OTCQX:TRTC) has none of them. In addition, a tell-tale sign of dubious management is when a company's share price is being driven by paid promotion and nothing else.
A promotion from cradle (and inevitably) to grave
Some stocks have an ever lasting impact from the circumstances that create it. In the case of Terra Tech, it crawled out of the great stock promotion primordial ooze. It all started with attorney Thomas Puzzo, who has set up shells for promotions over and over (see his public company involvement). A few of his most successful pump and dump creations include:
All of these promotions resulted in shareholder losses of at least 90%. Puzzo followed a similar pattern to set up the shell that eventually became TRTC (with his involvement beginning in as early as 2008). It was originally a company called Private Secretary with the symbol PVST. And the pattern was so clear that it would be a future promotion, an internet researcher using the alias 'nodummy' identified it in December of 2011 with these comments: "Here is another shell to keep an eye on in the future because it follows some similar patterns with NSRS and RAYS: Private Secretary, Inc (PVST). If you see a change in CEO and a name change/acquisition done by the PVST shell then the paid promotion shouldn't be too far behind."
A few things made PVST an obvious choice for a future promotion shell. The first is that it never made any real attempt at forming an actual business. In its original S-1, PVST claimed to be entering the Voice Over IP business. Yet, it only had one employee at the time, Maureen Frances Cotton. Maureen was 66 years old and the only experience she had with telecommunications was a stint from 1959 - 1962 as a switchboard operator / receptionist. Considering IP was not even invented at that time, the relevance of her experience was highly questionable. Even worse, according to the S-1, "Mrs. Cotton is employed elsewhere and has the flexibility to work on Private Secretary up to 10 hours per week. She is prepared to devote more time to our operations as may be required. She is not being paid at present."
The second big clue is despite the fact the only employee had no background in IP, was only working part time and was not even being paid, is that PVST actually found investors. In the last quarterly report (10-Q) before becoming TRTC, PVST reported having 48 million shares in the hands of anonymous 'investors'. These investors received these shares for a fraction of a penny per share with no restriction on the trading of these shares (making them completely free trading). As would be expected, PVST turned around and did not make much use of investor money. In fact, it looks like Private Secretary just did enough to keep the SEC filings current, but they ultimately walked away with lots of stock.
And just as 'nodummy' had predicted, PVST acquired a private company called GrowOp Technology Ltd. Its first step was to change Private Secretary to Terra Tech Corp and the stock symbol PVST to TRTC. Next, the management of GrowOp assumed control and management over the public company (see link). Derek Peterson took over the role of CEO, while his wife Amy Almsteier became the Secretary, Treasurer, and Director. The GrowOp owners got 34 million shares of common stock, as well as some convertible preferred stock. Maureen Cotton had been the only employee of PVST for five years and never received any compensation. As a reward for her service, all her shares were cancelled. On the other hand, the anonymous investors with a de minimis cost base retained all 48 million of their shares. With these shares spread across various anonymous investors, they retained the ability to sell their holdings at their leisure - meaning at any time and at any price.
This brings us to the third clue that TRTC was going to be a stock promotion. A typical reverse takeover of this nature (with the public entity having negligible assets) will result in existing shareholders retaining a minor stake in the new or merged entity (ie. 5% or less). PVST had no assets, yet its anonymous shareholders retained 60% of the common stock after the merger.
For what possible business reason and in exchange for what assets would GrowOp agree to a deal like that? Why would Derek Peterson, a former investment banker, agree to a deal with such unfavorable economics? The only value in the PVST shell was that it was a public company. Remember that while Maureen Cotton cancelled her shares, the anonymous PVST shareholders who contributed nothing to the business had a huge block of freely trading shares. The obvious conclusion is two fold: Maureen Cotton was just a figurehead; the real parties controlling the shell and now TRTC were the ones holding on to those 48 million shares.
Refer to Appendix B for more information on Terra Tech and Derek Peterson's use of buzz words outside of regulatory filings.
A very serious, repetitive and dedicated history with stock promotion
Putting aside all the issues that existed when the company was created, not much changed with the acquisition of GrowOp, as it was never much of a business. At the time of the merger, it had produced $630,000 of revenue over the previous 9 months, with a net loss of $605,000 (see financial statements). However, at least there was some business there that sold hydroponics equipment. This business was the key as it afforded management the ability to use various buzz words to hype up the business like 'sustainable', 'renewable' and most importantly 'medical marijuana'. Fortunately for TRTC, a few buzz words were all that it needed to fulfill its destiny to use promotion to advance its stock price.
In August 2012, the emails went out from such sites as Phd-Trading.com, StockParlay.com, PennyStockCheatSheets.com and PennyStockParlay.com touting TRTC as their new 'Monster Pick' and that it was "poised to become one of the biggest names in the agricultural industry". There was one common denominator, which was buried at the bottom of each promotion email. A disclaimer that Red Brick Media had paid them to send out the emails and that Red Brick Media "may have shares and may liquidate it". This continued for a few weeks before a new group of promoters started sending out similar emails - this time, interVCap LLC had paid for the marketing and the disclaimer noted that interVCap "will sell shares of common stock of TRTC in the open market at any time without notice". Not long thereafter, the promoters (Crème Dellatex Inc.) changed but the game did not. One month after another, the promoters and the parties paying the promoters changed, but the result was the same, an unidentified party paying for promotion. Now why would unidentified parties pay for TRTC to be promoted?
Then the story finally changed a little. Perhaps TRTC got tired of operating through other parties or perhaps they got lazy, but essentially they started to pay SmallCapVoice, another prominent stock promoter, directly. Over the next 15 months, TRTC compensated SmallCapVoice over $90,000 in cash and 450,000 shares of restricted stock. Not to be out done, Red Brick Media shows up again in February of 2013, by spending a whopping $550,000 on a promotion campaign managed by Capital Financial Media.
TRTC has been the subject of one of the broadest and most relentless promotional campaigns I have ever seen. This is not surprising given how much effort is needed to generate enough demand to dump 48 million shares of stock into the market. What is very surprising is that Derek Peterson (CEO) continues to blatantly lie about the company's involvement in any promotion throughout the campaign. In a December 2013 audio interview with 420 Investor (Audio track beginning at 48:50), Peterson responds to a direct question on the subject: "I have seen those things come through, we have an IR team…there are what they call email lists out there, again I come from white shoe firms, me learning how the penny stock world works was an eye opening experience, so there are email lists out there that put out you know promotion on companies, and you know generally those promotions result in sell offs and that type of thing down the line, so our company does not engage in that type of activity…". Obviously Peterson was not aware that his hired promoter had to disclose their compensation and SmallCapVoice makes it perfectly clear that the company does engage in that type of activity (see link of SmallCapVoice's current disclaimer): "TRTC: Small Cap Voice received five thousand dollars from the company on 1-18-13 for 30 days of service. On 3-1-13 Small Cap Voice signed a 180 day agreement for $2500 per month and 100,000 restricted shares subject to Rule 144 of the Securities Act of 1933 for the six month term. On 3/26/13 SmallCapVoice.com received an additional $30,000 from the Company to manage an investor awareness campaign on behalf of TRTC. SmallCapVoice.com, Inc. received cash payment of $14,000 from the Company on 5/29/13 from the Company to manage an investor awareness campaign on behalf of TRTC. On 9-1-13 Small Cap Voice signed a 180 day agreement for $2500 per month and 200,000 restricted shares subject to Rule 144 of the Securities Act of 1933 for the six month term. On 12-10-13 Small Cap Voice received an additional cash budget of $10,000 to hire additional groups for awareness campaign. On 4-1-14 Small Cap Voice signed a one year agreement for 150,000 restricted shares subject to Rule 144 of the Securities Act of 1933". Never a good thing when your CEO is caught lying.
If this was not enough, refer to Appendix I for more information on TRTC's history with promotion.
A management team with skeletons in their closet
To hear him talk, you would think Derek Peterson was pure as the driven snow and just shocked by all the things that happen with penny stocks. Now, we have already shown that his comments were factually challenged, but there is more. Exactly who is Derek Peterson? In October of 2010, The Telegraph UK, wrote an article and posted a video on Derek and Amy Almsteier's hydroponics business and their slogan, 'The First Honest Hydro Store'. As part of that 'honesty' Derek's last name was reported to be Oppedisano, not Peterson. Derek Oppedisano - what is the CEO's legal name and why did he change it? Terra Tech plays up the fact that Peterson was once an investment banker; however, if he's so good with financials, why in 2012 did he personally file for bankruptcy "On February 22, 2012, Mr. Peterson filed a petition for bankruptcy in the United States Bankruptcy Court for the Central District of California". Peterson (or Oppedisano) did not leave the world of 'white shoe firms' voluntarily. It turns out he was fired for not disclosing his marijuana equipment side business.
Amy Almsteier, like her husband, has no business background of her own that would qualify her to hold her current position as Treasurer. She maintains previous experience as an interior designer. Rounding out the TRTC board, Michael Nahass, Director, filed for bankruptcy likely due to casino debt in 2012.
As would be expected of a group of individuals, the controlling management of TRTC were defendants in a lawsuit. In this lawsuit, Amy and her husband Derek, were defendants in a case for wrongfully accepting over $300k through illegally traded securities in 2009. They "accepted illegally-issued, unrestricted IEAM securities to which they were not entitled, and which, upon information and belief, they resold for full market value to the detriment of IEAM and its shareholders". Sounds like a group of people that Thomas Puzzo would be delighted to involve in his quest for stock promotions. Refer to appendix D for additional details.
Refer to Appendix C for a detailed account of Derek Peterson's questionable recent past. See appendix E for additional details on Derek Peterson, Amy Almsteier, Michael Nahass and the rest of management. Appendix F outlines players surrounding TRTC that have similar issues. Appendix G highlights errors that the company has made in their filings. Given Terra Tech has had various accounting and filing issues, it is not surprising that management continues to deal with internal control issues noted in a recent filing, Appendix H provides a summary of these control issues, going concern details and shareholder dilution which seems imminent (more on this below).
A bad business as well
Penny stock investors are a forgiving lot. Even if the management of a company is suspect… even if we do not even know what their real names are… even if they are spending lots of money to promote the stock… and even if an unknown group controls a huge block of free trading shares with a tiny cost basis… it could all be forgiven if the business was actually decent. With marijuana in so many headlines, how could a business in this hot industry be bad? Well, let me show you.
As previously described, GrowOp was not a big business and it was losing money when it was merged with TRTC. Fast forward one year and realize that being a public company had done nothing to help matters. GrowOp, at this time, was instead facing the reality of shrinking operations. Sales in 2012 had fallen to $553,000 from $817,000 in 2011, a drop of 32% (see source). Losses had increased as well.
Faced with this reign of incompetence, any business owner would be intently focused on what to do to save the company. In the case of TRTC, the majority of the ownership was held by the mysterious holders of stock left over from the PVST shell. Their solution was obvious, do what they do best - another massive stock promotion. As the officers of TRTC had stock that was not as easy to sell, they had to come up with another solution. Apparently fixing the business or replacing management was out of the question, so in order to stop the bleeding they decided to copy PVST and try to acquire another 'real' business.
In January 2013, TRTC announced it was acquiring GroRite. GroRite was described as one of New Jersey's largest gardening super centers with 10 acres of retail gardening center, hydroponic cultivation facility and plant nursery. Derek Peterson stated: "GroRite's facility is amazing, they carry everything a home gardener would need". And hopefully they could provide exactly what TRTC desperately needed which was a viable business. The press release stated that GroRite had "annual revenue in excess of $4 million with positive net income" (source). This would have been a great addition, but TRTC did not actually buy GroRite. The letter of intent to buy GroRite must have fallen through and they ended up with the scraps, a cultivation business called Edible Garden.
At this stage, however, any addition of revenue would be helpful as the existing GrowOp business was in free fall. Revenues for the first quarter of 2013 had plummeted to only $66,000. With the Edible Garden's merger complete at the end of Q1 2013, revenue seemed to have bounced back to $665,000 due to the Edible Garden integration in Q2 2013 (source). Although revenues were higher, cost of goods sold were as high as ever $660,000. The remaining gross margin of $6,000 was nowhere near enough to cover overhead, let alone make it a viable business.
However, the hype from this acquisition was not meant to last. By Q1 of 2014, sales were plunging once again. Revenues were only $560,000, with cost of sales of $558,000 (latest 10-Q). That left only $2,000 of gross profit to cover a staggering $2.2 million of Selling, General and Administrative (SG&A) expenses. At this level of gross margins, TRTC would have to do over $500 million in sales per quarter just to cover their overhead. Appendix K provides additional details on how the increase SG&A is another sign of promotion.
TRTC got lucky to be swept up in the marijuana craze
Terra Tech has had a going concern note attached to its financial statements for as long as I can see. As early as March 31, 2012, the company continued to operate under this red flag. During this same quarter, the company had a $16.7 million operating loss driven primarily by $16.3 million of compensation expense. This expense did not show on the financials subsequent to this 10-Q. Another unmistakable sign of a promotion story is when management is being paid handsomely at the cost of shareholders. So why is this company in the stock market?
As marijuana has been legalized in a couple of states and discussion of broader de-criminalization efforts have hit the headlines, any company able to spell marijuana in a press release has generated investor interest. Even though TRTC cannot seem to run an actual business they have proven their ability to spell marijuana and put out press releases. Combine that with the constant promotion resulting in various pumpers spreading the word and all of a sudden TRTC has some hype. This hype has generated a market capitalization of in excess of $200 million.
TRTC remains desperate to build more than a house of cards. However, it was never meant to be anything more than just that. The stock has run over 100% in recent days on more hopeless hype. In the past few months, management has started a new initiative in Nevada, perhaps after realization that they have next to no marijuana operations. Medifarm, a Terra Tech subsidiary has filed for four separate medical marijuana licenses in Clark County, Nevada. Terra Tech's current hopes weigh on an application to become a dispensary in Nevada. However, we believe regulators in Nevada are working diligently to weed out (no pun intended) the poor applicants and just in case they miss this publicly available diligence regarding Terra Tech and its dubious management team, a copy of this diligence has been made available to them. As such, it is highly unlikely that the company will receive the nod to dispense. The information laid out in this report implies a low likelihood of a successful application in Nevada.
After all the hype, TRTC remains a glorified lettuce producer
Prior to the acquisition of Edible Gardens, TRTC's hydroponics business had faded away to less than $100,000 of revenue per quarter. After the inclusion of Edible Gardens in Q2 of 2013, management discussed the increase in revenue and admitted that "The primary reason was due the revenue generated from Edible Gardens." Certainly some people have bought hydroponic equipment from TRTC to grow marijuana for either legal or illegal purposes. But the reality is that almost all the business now is growing produce (source).
But hold on, perhaps the company has intellectual property in hydroponics it can leverage for fast growth? Unfortunately, it does not. Per the 2013 10-K, the business "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.", and the company also states "We do not own patents." The net result is a company that is overvalued on all fundamentals with no real intellectual property.
So it begs the question, where is the value in the company? Perhaps the 2013 acquisition of Edible Garden should help. On April 24, 2013, Terra Tech purchased Edible Garden and its 5 acres of greenhouse structures through a share exchange. The company in its own disclosure lays out the potential of the land "The facility, at maximum production, can produce up to 25,000 plants per week, per acre, operating 52 weeks a year at an average sale price of $1.55 per plant. The Company believes that at full production, the facility is capable of producing up to $10 million in annual sales." With $2 million of revenue in 2013, Terra Tech is far from its prior promises.
Refer to Appendix J for details on valuation.
The business is so bad, TRTC is forced to raise capital on egregious terms
The company on March 23, 2013, raised $504,500 through a senior secured promissory note bearing interest at 60% per annum. It raised another $250,000, $153,000 and $229,000 for another 60% annual interest rate in Apr-13, May-13 and Jul-13.
In Feb-14, Terra Tech entered another significantly dilutive agreement with Dominion Capital to receive up to $6.6 million for 18 months of liquidity. All notes are convertible at $0.307 a share which represented a 46% discount to the close price on February 5, 2014. I note that this does not even include the warrants.
"As of October 28, 2013, there were 123,577,646 shares of common stock". Shortly thereafter: "As of December 31, 2013, the Registrant had a total of 233,802,141 shares of common stock issued and outstanding". There have been minimal changes in operations or the company during this three month period. The only change was Terra Tech being forced to report their real share count (inclusive of converted preferred shares).
As at 31-Mar-14, the company has 246 million shares outstanding in addition to 19.5 million warrants outstanding (at an average price of $0.21 per share). Couple that with the 21 million shares and 11 million warrants granted to Dominion Capital for convertible notes held and to be issued. Total shares outstanding are approximately 298 million. The market cap is thus just shy of $224 million for a company that has $2 million in revenue. This 112x revenue multiple yells 'overvalued'.
With only $3 million of cash on its books as at March 31, 2014 (per latest 10-Q) and $1.5 million cash burn (aka cash used in operations per cash flow statement), the company is on pace to be out of cash in one or two more quarters. I guess it makes sense that they filed an S-3 on April 17, 2014 for a proposed raise of up to $50 million which basically sets the current shareholders up for massive dilution.
To top it off, insiders are cashing out
Insiders have sold $1.1 million of the company in the last few months. In addition to that, take a look at the circled disposition from Amy Almsteier (treasurer/decorator) to Michael Nahass. Why would one director transfer 2.5 million shares to another for no consideration?
Additionally, it looks like Amy Almsteier purchased 100k of shares at $0.58, but do not be fooled - she was really paying a penalty as a result of yet another violation of Section 16(b) of the Securities Exchange Act of 1934. Derek and Amy, CEO and treasurer, have cashed out a little under $400,000 recently and like other areas of their lives are unable to follow rules.
Terra Tech is another story whereby a faulty management team is touting a lot more than they will ever achieve. Eight companies that operate in the marijuana have had their trading suspended this year, I would not be surprised if TRTC is next (refer to Appendix A for details). Management's history is quite the opposite of the pristine quality that they proclaim. TRTC has a downside of 90% to equity holders with insiders selling out and an imminent financing.
Appendix A - Don't get caught in the weeds
Eight companies have been suspended in the marijuana space this year due to lack of current and accurate information - Is TRTC next? Please note that two are still halted.
It is my view that TRTC may not be far behind. TRTC has a similar story to Advanced Cannabis Solutions (OTCQB:CANN) and Growlife (OTCPK:PHOT). CANN was halted "due to a lack of current and accurate information concerning the securities of Advanced Cannabis". PHOT was halted for "questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in PHOT's common stock".
Appendix B - Terra Tech days in the spotlight are numbered as it has little to no real exposure to the cannabis industry
Since its inception, Terra Tech played up its potential as a marijuana company even though it had little involvement in the space. In early press (prior to Terra Tech assuming the PVST shell) during 2011, "GrowOp Tech doesn't actually sell medical marijuana, just the equipment that can be used in its cultivation". This is further confirmed by its initial filing document months later where 'cannabis' or 'marijuana' are not even mentioned once. However, this did not stop Terra Tech and its principal agent Derek Peterson in spreading buzz words like wildfire. Derek Peterson has been talking up its potential as a Marijuana play since at least 2012. Sadly, two years later, after spending millions of shareholder dollars, the company has barely got its foot in the marijuana door.
The excitement around TRTC revolves around its exposure to the cannabis space. It's most recent 10-K clearly states that the company operates in two distinct markets: Commercial AG and Retail AG. The commercial vertical assists in the transition to controlled indoor environments whereas the Retail AG conducts business through GrowOp Technology which develops horticulture equipment - neither of these has any relation to the cannabis space. Marijuana or cannabis are mentioned just eleven times in its most recent 10-K, yet all the company press releases in the news section of its website are in relation to marijuana. TRTC being in the cannabis space would be similar to Plug Power (NASDAQ:PLUG) being an automobile manufacturer.
Appendix C - Naturally the whole team will be led by a guy who I would not trust as far as I could throw him, Derek Oppedisano or Derek Peterson
As recent as 2010, open market information has his name as Derek Oppedisano: "Amy Almsteier and husband Derek Oppedisano founded WeGrow after Derek broke his neck surfing".
Everywhere else he is currently known as Derek Peterson. As per the Terra Tech website, the CEO is named Derek Peterson. Is a CEO with two last names (and no explanation) really one that you want to invest your money with?
Derek's bright idea after leaving Morgan Stanley was to create a pot version of the truck Mr White and Jesse use in Breaking Bad, see video at the bottom of this link "he founded a company called GrowOp Technology that sells hydroponic trailers intended for the growing of medical marijuana (even though their website never clearly states that fact)". If a picture is worth a thousand words, see Derek climbing this makeshift step ladder on to his flagship product, a cannabis truck on wheels.
Derek later contradicts his previous business endeavour citing risks with smaller growers "'Who do you want growing your weed?' he [Derek] asks. 'Some guy in his garage, or people that cultivate food grade quality products and operate large scale facilities under GFSI certifications."
Derek has spent most of his career working in finance, from being an independent broker to working on the investment banking side of things. The latest 10-K specifically states that "Mr. Peterson's background in investment banking led to our conclusion that he should serve as a director in light of our business and structure". But if he's so good with financials, why in 2012 did he personally file for bankruptcy. Further, why is a former financial services guy who cannot personally manage his own money responsible for a hydroponics company? Of course, he has jumped on the band wagon and wants to play the marijuana hype. Although… his company really does not have much involvement in cannabis.
Derek is often praised for his successful business history. "Morgan Stanley fired him seven months later for his pot side business" - this goes to show that Derek cannot follow the rules and that he was not pardoned for mistakes made at Morgan Stanley. On Derek's Linkedin, he states that he is the current owner of ThePuffingtonHost.com, however this site yields this: "The Website Ahead Contains Malware!". See the result here:
Either Derek has once again made a clerical error or he is trying to spread malware.
If that was not enough, just listen to Derek on a call with 420 investors, at 10:14 "umm, one of the…couple of things I want to discuss before jumping into the meat and potatoes tonight is you know, number one I hate giving formal presentations, umm I love dialogue, I love questions and answers. I have ADD so…running through a formal presentation is just torture for me, so I don't want to torture everybody else with that" - has any CEO in history ever said that they hate presentations. Feel free to listen to the rest of the call but to be honest, for being a CEO of a public company, Derek seldomly mentions any business initiative that the company is actually involved with. I am also a little confused; this call took place at the end of 2013 and Derek is quoted as saying "[13:48] So I want to make sure I clarify our model going into 2015…[22:24] pot.com is something that is going to be a heavy focus rolling into 2012…[26:36] we are in the throws of determining how we handle that going into 2014" I would not trust management as a steward of my capital.
Appendix D - I did not have to look too far to find that the Petersons' have been charged for wrongful acts before
In the lawsuit referenced in the body of my report, Amy and her husband Derek, were defendants in a case for wrongfully accepting over $300k through illegally traded securities in 2009. They "accepted illegally-issued, unrestricted IEAM securities to which they were not entitled, and which, upon information and belief, they resold for full market value to the detriment of IEAM and its shareholders". It is said that they were involved in a "large-scale scheme to loot the IEAM". If they acted to the disbenefit of shareholders before for their own gain, what is to stop them this time? All of this was done with Derek's old chum Eric Krogius at Crowell Weedon & Co (where he first worked). Industrial Enterprises of America (OTC:IEAM) subsequently collapsed, filing for bankruptcy on May 1, 2009:
Appendix E - Next, I will outline issues surrounding the rest of management and discuss corporate governance issues that are plenty
First and foremost, the company's CEO, Derek Peterson is married to Amy Almsteier. Amy has a meaningful role in the company, being its largest shareholder, has responsibility for accounts and maintaining the position of Treasurer on the board. Amy and her husband are the company's largest shareholders, holding just shy of 40% of total shares outstanding and also control a majority of the voting rights. Before you get excited, most shares were granted to the couple that have a zero cost basis.
Like her husband, Amy Almsteier has little to no experience in the marijuana space. At 0:47 into this video, Amy explains that "You give them 18 hours of light and 6 hours off, this tricks them into thinking it is spring and summer" - is tricking plants really the IP needed to grow quality bud? Amy is currently responsible for the company's accounts on the management side and is Treasurer on the board. Given her previous experience as an interior designer, she could not be a more ill-advised candidate for the job. Her Linkedin profile is not what you would expect of a person who is treasurer of a $224 million company.
Rounding out the team, with the acquisition of Edible Gardens, the VandeVrede family was brought on and also has various members working at Terra Tech. With most of the immediate family working for Terra Tech, it would make sense to keep business within the family, I guess? For example, the company continues to lease land in Belvidere, New Jersey from the parents of director Ken VandeVrede's parents David and Gerda VandeVrede. This sounds like a related party transaction.
Michael Nahass became a director in early 2012. Michael has also previously filed for bankruptcy "On May 13, 2009, Mr. Nahass filed a petition for bankruptcy in the United States Bankruptcy Court for the Central District of California, Case No. 8:09-bk 14465-TA. The discharge date was August 17, 2011". Michael was indebted to Las Vegas Casinos, Mandalay Corp and Bellagio LLC, for what would appear to be gambling debt…seems like a great choice for a board member.
Appendix F - Terra Tech is surrounded with players of similar stature
A questionable company and leadership team is not without the partners. Derek was once partners with Dhar Mann. Dhar was charged in 2012 for defrauding the city of Oakland and "sentenced to five years probation for pocketing city grant money meant for building improvements". While partners, they endeavoured to become kingpins in the marijuana world with reality TV shows and grow ops: "It's a hedge,' Peterson explains. 'If we screw everything up in our personal lives and our businesses go down the drain, they're gonna love that in TV land'". After all this excitement, Derek and Dhar had a falling out. Dhar now has a claim against Terra Tech of $2.2 million for wrongful share sales of 37.5% in WeGrow.
TRTC's auditor also has fleas. Tarvaran Askelson & Company, LLP was inspected in August 2011 by the Public Company Accounting Oversight Board. TRTC's auditor had "a departure from GAAP that related to a potentially material misstatement in the audited financial statements concerning the balance sheet presentation of advances to an affiliate".
Appendix G - With poor leadership and partners, can any statement that Terra Tech makes be trusted?
Using an accounting firm that does not know how to do its job is just one part of the problem. In relation to their filings, the SEC also had issues with the company's filings in November 2013, December 2013 and January 2014. It appears that TRTC cannot get its share count or addition right "[November 22, 2013 SEC comment] The number of shares you show as outstanding before the offering, and the number of shares you used for the calculation in footnote 1 to the table on page 24, and the number of shares you show on page 35 as issued and outstanding on October 23, 2013, does not reconcile... [December 18, 2013 SEC comment] We note from your response to comment 1 that you currently have 134,888,622 shares of common stock outstanding. We also see, according to your most recent balance sheet that you had 101,165,307 shares of common stock outstanding as of September 30, 2013… [December 18, 2013 SEC comment] If true, please indicate that the 222,644,089 shares of common stock outstanding as of
December 2, 2013…[January 3, 2014 SEC comment] We have reviewed your response to prior comment 2 and your disclosure on page 9 that you have 232,937,563 shares of common stock outstanding on a fully diluted basis… Please advise and revise your disclosure as necessary." If the SEC has this many issues with the Terra Tech's filings, should shareholders believe anything in the company's filings?
Management competence is questionable:
With management directing you to an event which is almost 2 years in the past, can we really trust any information they present to us? It would appear that the site is there for investor relations rather than for the purpose of attaining customers.
Appendix H - Adding fuel to the fire, the players around the company add to the bone of contention
In my experience, going concern issues, lack of internal controls and management concern over dilution are red flags that raise many burning questions about broader issues at companies. During a recent filing, the company provided its results of a review of internal controls "Based on that evaluation, completed only by Derek Peterson, our President and Chief Executive Officer, and Michael James, our Chief Financial Officer, Messrs. Peterson and James concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules". It is specifically outlined that control weaknesses included: "lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors", inadequate segregation of duties and ineffective controls over period end financial disclosure. This again is concerning given the board claims to have a robust management team. These alone form a compelling reason to get out now.
Its auditors have little faith in the company "Our auditors have expressed uncertainty as to our ability to continue as a going concern as of our fiscal year ended December 31, 2012". During its most recent 10-K, the company continued to have a going concern issue.
Internal controls are sub-par "Our disclosure controls and procedures were not effective as of our most recent quarterly period ended June 30, 2013, which means that we may not timely be able to make our disclosures in our filings with the SEC."
The company itself is concerned about diluting shareholder equity "We anticipate that our existing cash and cash equivalents will not be sufficient to fund our longer term business needs and we will need to generate revenue or receive additional investment in the Company to continue operations. Such financing may not be available in sufficient amounts, or on terms acceptable to us and may dilute existing stockholders".
Terra Tech filed an S-3 on April 17, 2014 for a proposed raise of up to $50 million which basically sets current shareholders up for massive dilution, as the company has indicated.
Appendix I - A very serious, repetitive and dedicated history with stock promotion
Is it a coincidence that there have been multiple instances of potential wrongful stock promotion of the company? Just recently, the stock was being promoted:
As previously mentioned, a key player was SmallCapVoice who not only promoted TRTC directly, but that they acted as a conduit to enable further promotion. In April 2013, another round of promotions hit, and this time paid by SCV Inc. (more likely than not to be an abbreviation for SmallCapVoice) and discloses that it is assumed they "may have shares and may choose to liquidate them at or about the same time these services are performed". In May 2013, a new round hit with payments from Odd Marketing LLC.
SmallCapVoice then paid other promoters such as PennyDoctor.com on April 2, 2013. Stock Appeal got $10,000 from SCV Inc. OTPicks.com got $2,000 from SmallCapVoice for June 2013 email. Other promoters such as TheGreenBaron (see TRTC promotion by TheGreen Baron here), who often works with SmallCapVoice, were likely also beneficiaries, but they did not disclose exactly who was paying them. In February 2014, there was more blatant promotion by the Green Baron. In the company's disclaimers, they state "We have received (U.S.) $7,000 for the distribution and coverage of Terra Tech Corp. as a Green Baron "Stock Alert" beginning in January 2013".
On June 5, 2014, see an example of stock promotion by SmallCapVoice:
In October 2012, Goldman Small Cap Research posted a report on TRTC. Timothy Sykes, a penny stock guru, suggests "Very similar to how Goldman Smallcap Research tricks the financially ignorant into believing they are associated with Goldman Sachs while in fact they too are compensated and conflicted penny stock promoters whose picks I've successfully shorted several times before…almost uniformly for solid profits since the promotions inevitably fail and their "picks" inevitably crash". This was posted as a "Goldman Opportunity Research" report, and on Goldman Small Cap's website, they state "Opportunity Research reports, updates and Microcap Hot Topics articles reflect sponsored (paid) research".
And yet another. Microcap Millionaires has no problems suggesting TRTC as its first pick.
Appendix J - The initial combined business was not particularly good, but if that was not enough, the last straw is that the company has little underlying fundamental value
GrowOp Technolgy Ltd was acquired by the shell as previously stated. Its financials at the time paint the picture of a company in need for constant capital infusion required to avoid bankruptcy. As per nine months ended September 30, 2011, the company was able to squeeze out a 30% gross margin, yet had a $587,166 operating loss on revenues of $630,329 - this would imply a (93%) operating loss as a percent of revenue. Over this same period, just under $900k of cash were used in operations.
Breaking down the 2013 10-K, with a 285% increase in revenue, one would picture expanding margins and greater cash flows. On the contrary, gross margins contracted from $101k to $89k with gross margin percent moving from 18% to 4%. Meanwhile, selling, general and admin expenses (SG&A) increased 233% to $3.6 million. Revenues are not only small, they are 68% less than SG&A. The only reason that net loss from operations improved is because there was no goodwill impairment in the 2013 fiscal year. Cash used in operations was $3.9 million compared to $248k in 2012, a ~1400% increase in cash burn during 2013. Most of the revenue to date has been generated as the result of growing farmable crop, specifically lettuce.
Valuing such a business is fraught with issues, but perhaps we can be generous and apply a 10x revenue multiple on last twelve months revenue. Even so, the company would only be worth $21 million implying that the current market capitalization of $224 million is 10x greater than fundamental value. Terra Tech is could fall over 90%.
Derek Peterson and his wife Amy Almsteier, completed a Reverse Takeover (RTO) to create Terra Tech. The deal was valued at $4.8 million on the balance sheet with over 99% of value allocated to goodwill:
This goodwill was then completely written off in 2012, which was less than ten months later:
This implies that their shares should not be worth anything given this is the consideration for which they acquired the shares in the RTO.
Not to mention that the company spends 35% of its current revenues, equivalent to $738k in consulting expenses. Given this is a very significant portion of total revenues; you would think the company would provide some details on who these consultants are and the nature of their work? There are none! Are these expenses in relation to the third party promoters?
Appendix K - SG&A through the roof
SG&A expenses have been outpacing revenues for years. This often happens in promotions where insiders are compensated even if the result has a negative impact on shareholder value. With deteriorating gross and operating margins and increasing SG&A expenses, it is evident that TRTC's business has and always will be terrible.
Disclosure: I am short TRTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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