June 26, 2014: Terra Tech Corp (TRTC) is yet another marijuana company on the Pump and Dump circuit. It isn't one that's made a recent switch from, say, gold mining to pot; from its inception in early 2012, CEO Derek Peterson's plan was to begin by selling equipment for hydroponic growing of weed and--if one must--vegetables, and move into cultivation and production of marijuana products when legal issues were clearer.
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TRTC chart, 24 December 2013 to 24 June 2014
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Fundamental questions about the company, its management, and its prospects have been present from the start, and they remain. Though it has revenues, its losses are significant, and its ambitious plans to enter the new Nevada marijuana market will be expensive to realize, and will not provide an immediate influx of cash.
Terra Tech
What is now the publicly traded TRTC began as a private company called GrowOp Technology. It was founded by Derek Peterson in California in 2010.
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| GrowOp California incorporation |
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| Amy Almsteier |
In its first year as a public company, TRTC did not thrive. Sales of its hydroponic equipment and supplies flagged, as the company's financials show. Peterson decided that in order to realize his ambitions, which reached beyond selling tanks to growers of produce and, of course, marijuana, he needed to prepare for the day when cultivation of weed would be legal in many states, not just California. To that end, in April 2013, he executed a Share Exchange Agreement with the five shareholders of a private company called Edible Garden, all of them siblings.
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| Ken VandeVrede |
And so the company as we know it today was born.
Derek Peterson
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Derek A. Peterson
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Puzzlingly, FINRA Broker check says he's not currently registered as a broker, though in the "employment history" part of the report it's noted that he's worked for Monarch Bay Securities since November 2012. He doesn't mention Monarch Bay in the biography that appears in TRTC's most recent 10-K, and isn't named as a member of the Monarch Bay "team," so it's not clear whether he's still associated with them or not.
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| Peterson's employment history, from Broker Check |
Peterson's wife Amy Almsteier, a former interior designer, is also involved with Terra Tech. In addition to being a 37 percent owner of the company, she serves as secretary, treasurer and director. TRTC does have a CFO as well, Michael James. Another director, Michael Nahass, is a registered rep. According to Broker Check, he, like Peterson, worked for Morgan Stanley a few years ago; perhaps the two met there. Nahass is currently employed by Arque Capital Ltd., an Arizona company with an office in Irvine, California. Nahass and Peterson have something else in common: both declared bankruptcy not long ago; Nahass in 2011, evidently as a result of gambling debts, and Peterson in 2012, for other reasons.
The success of Terra Tech must be important to the well-being of everyone involved.
Financing efforts
TRTC has so far enjoyed no financial success. Though, as intended, Edible Garden provides some revenues, losses are significant: $6 million, or $0.06 per share, in fiscal 2013. The first quarter of 2014 showed no improvement. Net loss for Q1 alone was $4.9 million, or $0.03 per share. The company's supporters contend that you have to spend money to make money, and that Terra Tech is laying the groundwork for a glorious future. Certainly it's true that the marijuana industry is new, and that the companies entering the sector must start from scratch, since until recently cultivating, processing, and selling weed for either medicinal or recreational purposes was illegal in most states, and still is in many. Building an infrastructure while dealing with strict state regulations and prohibitions on interstate commerce is costly.
No one knows which of today's infant pot companies will succeed, or are indeed legitimate, though TRTC's many passionate fans are sure their company--and stock--will come through with flying colors. They aren't concerned with earnings, or even revenues, at this point. They approve of Peterson's business plan, and are convinced their seedling will flower into a robust plant. Early this year, Peterson told the Wall Street Journal that he wanted to build a greenhouse for the cultivation of pot "in every major city." He also wants to develop his own branded marijuana strains.
All that will obviously require a great deal of financing. Like nearly every penny stock company, TRTC has a good deal of convertible debt. One creditor is Hanover Holdings, which is part of Joshua Sason's Magna Group. They consider themselves to be venture capitalists; most penny stock observers correctly think of them as toxic financiers. In April 2013, Terra Tech entered into a stock purchase agreement with Hanover. Hanover committed to purchase $5 million of the company's stock over a 36-month period. The shares would be priced at $0.165, which was approximately what they were trading for in the open market at the time. The deal included registration rights for the stock to be issued. Accordingly, on 9 May 2013, the company filed an S-1 to register the stock to be issued to Hanover from time to time, and to register stock underlying debentures issued to four other investors in a separate transaction.
The SEC was not at all happy with the registration statement. A reviewer from the Division of Corporation Finance sent Peterson a brief letter saying in part: "… You have not included the consent of your auditor, as required by Item 16 of Form S-1 and Regulation S-K Item 601(b)(23). For this reason, we will not perform a detailed examination of the registration statement and we will not issue comments because to do so would delay the review of other disclosure documents that do not appear to contain comparable deficiencies." Additional problems triggered additional correspondence, and the filing went through seven amendments. It was finally deemed effective on 30 September 2013. By that time, TRTC had reduced the number of shares to be sold to Hanover to 10.1 million, all of which were purchased by year's end.
It seems the reason for the reduction in the number of shares Hanover was willing to buy was a decline in the price of Terra Tech's stock. By October 2013 it was trading between $0.07 and $0.08, and so would have to double for Hanover to break even on its investment. They must have had some faith in Peterson and the company, though, because they agreed to sign up for another round of financing at a stock price more favorable to them. On 28 October, a new S-1 was filed, registering another 19 million shares to be sold to Hanover at $0.07 a share. The intent of the original share purchase agreement had not changed: Hanover was still to buy $5 million worth of TRTC's stock. By the time the registration statement was deemed effective on 24 January 2014, the stock was trading at $0.38 and on its way to $1.42, courtesy of email and social media promotions. This gave Hanover a shot at a tidy profit. It is not known how much of that stock Hanover has bought and sold; no mention of it or its purchases appears in the company's 10-Q for the first quarter of 2014. Terra Tech did raise $5.77 million from financing activities in that quarter, however, and notes that it needs to "continue to raise funds to cover working capital requirements until we are able to raise revenues to a point of positive cash flow."
Licenses, critics, and evil short sellers
Part of Peterson's strategy is to try to get into the marijuana business in Nevada on the ground floor. With that in mind, on 19 March 2014 he formed a Nevada company called MediFarm, LLC, which is currently a non-operating subsidiary of TRTC. Nevada legalized medical maryjane in 2013, and in March of this year final regulations for the administration and control of the program were approved by the state legislature.
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| Las Vegas dispensary license hearing, 6 June 2014 |
Just before the hearings were to begin, an anonymous author published a scathing article at Seeking Alpha. Much of it was dedicated to cogent fundamental analysis, but what sent Peterson through the roof was the writer's assertion that no license of any kind would be forthcoming, because "a copy of this diligence has been made available to [the Clark County commissioners]."
And sure enough, when the list of dispensary licensees was published, Terra Tech was not on it.
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Norman Gates
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Peterson declared that he believed the emails sent to the commissioners had had an effect on the success of TRTC's application for a dispensary license, because the commission was "under a cone of silence which did not allow us an opportunity to defend against or respond to the allegations." He further informed investors that he'd hired legal counsel to pursue Gates and anyone else involved "to the fullest extent permitted by law."
In his interview with Small Cap Voice, he elaborated, concentrating on the fact that the Seeking Alpha author had disclosed, as he properly should have done, that he was short TRTC. Evidently Peterson or one of his supporters in Nevada had learned that some of the emails sent to the Clark County commissioners had come "directly from firms in Canada." His conclusion was that those firms were part of an organized "short attack" on the stock. Claims of "short attacks" always catch our attention, as in the penny arena they're almost always made to deflect investors' attention from problems within the companies that make them. It TRTC's case, it seems to be a low blow. Peterson prides himself on having been a "Wall Street" professional, at least when it suits him. Given that, he surely understands that short selling is part of a healthy market. He added that he'd opened a dialogue with the FBI and the SEC, and was seriously contemplating a tortious interference action against the perps.
For the rest of his phone chat with SCV, Peterson tried to clear up some of what he saw as inaccurate information about himself and his company. Among other things, he claimed he did not use promoters to sell TRTC's stock. Never! he said. He was interested in hiring reputable investor relations firms, of course. And TRTC does, according to its OTCMarkets profile page, have an IR firm called Porter, LeVay and Rose. But what, then, is Small Cap Voice? We think of them as a promoter; they take money to say nice things about penny stocks. Can Peterson not see that? The SCV interviewer self-righteously noted that they have no monetary interest in pumping stocks, because they're paid in restricted shares. He neglected to mention that they're also paid in cash, and that they send email blasts to subscribers and "manage investor awareness campaigns." They've been working for Terra Tech on and off since January 2013.
On 17 June, another hearing took place in Clark County, this one for the assignment of processing and cultivation permits. The proceedings moved much more quickly than they had for the dispensary licenses. The commission granted 101 licenses in all; MediFarm received both kinds. Ninety percent of the applications received were approved. Many shareholders seemed to feel that just wasn't special enough for TRTC.
Tortious interference or the exercise of civil liberties?
Had Peterson made a mountain out of a molehill? Now and then penny CEO's threaten their critics. We're not immune: back in February, hapless but crooked Gary DeRoos of Citadel EFT (CDFT) announced that he planned to sue over our CDFT exposé, posting an incoherent "Authorized Statement" at a website by the same name. Its title was "PumpandDump [sic] Refuted: Gary DeRoos… Responds to Online Smear Campaign." He then proceeded to refute nothing at all.
Though DeRoos persisted for awhile, the threats stopped when the SEC suspended CDFT. We were right after all. That's usually the case in situations of this kind: the critics are right. Is Peterson's case any different?
Peterson has announced his intention of bringing suit for tortious interference with TRTC's business, based on his belief that the company failed to obtain a dispensary license because of the emails sent by individuals he's sure are short sellers. The Seeking Alpha author did try to influence the Clark County commissioners; he proudly admitted to that. What we don't know is whether he succeeded in doing so. Are any commissioners prepared to say they were swayed by the emails they received? If not, no legal action is likely to result in an award of damages to Terra Tech.
While "basher suits," though uncommon and almost always unsuccessful, are occasionally filed, tortious interference litigation is rare, so if Peterson goes ahead, a debate is likely to be opened. Writing an article for any publication, including Pumps & Dumps, is an expression of opinion, whether the author is long the stock, short, or has no position. In this case, does communicating those opinions to the commission--who, as many online posters have pointed out, are government officials--cross a line? If so, in what way is it different from, say, filing a tip or complaint with the SEC about problems with a company's financials? That, too, could ultimately interfere with the entity's ability to do business. How about writing to Congress outlining the iniquities of banks, credit card companies, or other unpopular entities? Or signing and appending comments to those silly petitions that'll be read by the White House if only they get enough signatures?
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| TRTC short interest, 13 June 2014 |
Predictably, Terra Techies are screaming for Shorty's blood on the message boards, some lapsing into the usual babble about NSS, or naked short selling. Peterson has not brought that up, and is unlikely to do so. So far, his approach to what he sees as a problem has been more measured. One hopes that whatever action, or inaction, he decides upon, it won't lead to the kind of tiresome and fruitless witch hunt in which some penny companies engage.