- We uncovered lawsuits against TRTC from alleged unpaid suppliers.
- Toxic Convertible Debt provides significant potential for shareholder dilution.
- Related party transactions cost shareholders $51.5 million for 1 dispensary, 1st dispensary license was received via bribery.
- The auditor has an adverse opinion on financial controls and financials show a declining business that burns cash.
- All of the mgmt team has past personal bankruptcies or a shareholder wipeout. CEO and Treasurer filled personal bankruptcy. CEO was allegedly involved in Mazzuto Scam & paid a settlement. The legalization of Marijuana not only provides a huge opportunity for real entrepreneurs but it also provides one for people with a history of penny stock promotion & bankruptcies. Terra Tech is the latter.The last 2 businesses that Terra Tech’s CEO (TRTC), Derek Peterson, has been involved in resulted in people being convicted for crimes. One was convicted for embezzlement and in the other a union official was convicted for taking bribes from his co-founder. We have uncovered different but equally concerning abuses of governance and self-enrichment at TRTC. Self-enrichment starts with TRTC’s foundational $51.5 million related party purchase of one single dispensary, Black Oak, from its CEO (Source – pg 42 -10k). Issues in the management suite don’t stop at the CEO. The CFO appears to be a crash test pilot for driving micro cap stocks to zero, having been involved in at least three total shareholder wipeouts, the last time holding the title of CFO & CEO. The current COO (and former Treasurer of TRTC) filed for personal bankruptcy due to unpaid gambling debts and allegedly lied to Casino’s to obtain credit, which makes him an unusual choice for COO.
The fact that TRTC is a paid stock promotion, a reverse merger (10-k pg 4), and that management team have been selling lots of stock is just the tip of the iceberg.
TRTC’s financials show a company bleeding cash. We will present recently filed lawsuits that TRTC’s businesses allegedly are unable to pay suppliers on time. We believe these lawsuits may trigger a default on TRTC’s recently issued toxic convertible bonds. Even if TRTC succeed in dismissing these suits we believe the end may still be near. TRTC’s three core businesses are all showing signs of declining. We provide a detailed explanation of: Dispensary & cultivation business (impressively they even lose lots of money selling marijuana when the industry is booming); Edible Gardens (sounds marijuana related, but they really sell fresh basil & lettuce at a net loss); and IVXX (the company’s self-created Marijuana brand that went from 200 distribution points in 2015 to 6 today).
We caution investors that the financial picture could be worse than the numbers we have analyzed in the company’s public filings. TRTC’s auditor Macias Gini & O’Connell LLP, (whose only other public company clients have a combined market cap of <$3m) has rendered an adverse opinion on the company’s financial controls.
Before we discuss executives selling shares at an alarming rate, paid stock promotion and a long history of past financial misdeeds by management, including the alleged diversion of deals away from the public company and to their private investment vehicles, we will focus on TRTC’s immediate liquidity concerns.
TRTC finds itself in a weak financial position, (with only $4.5m of cash on hand (pg 3 10-Q) at the end of Q1 and a burn rate of $6.7m during Q1(pg 4). In early 2018, TRTC issued Convertible Debt twice, the terms of the convertibles were highly punitive for equity holders. They allow the holders to short stock in advance and convert into equity at a 22 to 24% discount to the lowest 2 day VWAPs in the prior 13 days (source). In default, the discount would increase to 41%. At the current price in a no default scenario shareholders can expect dilution of ~36%. Dilution increases as the share price drops. These types of debt instruments are often referred to as “death spiral” and make convertible holders somewhat indifferent to a falling stock price. In our opinion these structures not only serve to flag the company’s desperate capital position (having only a little over 2 months of cash in the bank at present burn rate) but increase the level of certainty that the equity ultimately goes to zero while the convertible holders profit.
We have uncovered further lawsuit’s that allege internal fraud and preferential dealing has occurred at Terra Tech. The suits allege members of management conspired to direct deals to themselves as opposed to the public company and that Terra Tech employees were complicit.
If equity holders are clinging to the hope that the management team might be able to turn things around we would suggest they pay attention to the recent executive departure. On April 20th2018 Ken VandeVerde the Chief Agricultural Officer resigned. He was he only member of the management team & board that we have not found to have been declared bankrupt or previously involved in stock promotion. Unlike most directors that bow out quietly he resigneddue to disputes with the company, and now Terra Tech is accusing him of committing fraud.
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