In an attempt to raise capital for generate corporate needs, Terra Tech Corp (TRTC) issued 12% senior convertible promissory notes in the aggregate principal amount of up to $11,000,000, each with a two-year term, that are convertible into shares of common stock and warrants to acquire common shares.
The purchase of $6,000,000 of notes is expected to occur in three tranches (can be as many as 5 traches is at TRTC’s discretion) of $5 million each. The first tranche of $3.25 million closed with the execution of the agreement. the proceeds of this tranche included the repayment of two recently received demand notes in the aggregate amount of $1,250,000. The second tranche of $2 million is expected to be made 30 days thereafter and the third is expected to be made in a subsequent 30 days in the amount of $750,000. At any time more than 30 days after the third tranche, TRTC may request up to an additional $5 million from the purchasers in up to five additional tranches (each for $1 million).
TRTC also granted warrants in connection with each additional tranche. To access the additional tranches, the company must give 30 days’ notice prior to each additional tranche and at least 30 days must have occurred between each additional tranche and the immediately previous additional tranche. The final additional Tranche may not occur later than May 27, 2017.
TRTC incurred $235,000 in fees in connection with the agreement, all of which were paid on or about May 27, 2016. Legal fees were $35,000, commitment fee for additional tranches was $100,000, due diligence cost $40,000, and a $60,000 advisor fee to Aegis Capital Corp which served as the placement agent.
TRTC granted the purchasers a first priority security interest in all of its assets pursuant to the terms of the security agreement, IP security agreement, and subsidiary guarantee.
Convertible Note Overview
Each convertible promissory note has a 24-month term and accrues interest at a rate of 12% per year, of which nine months’ interest amount is guaranteed, payable on each conversion date for the principal amount then being converted and on the maturity date in either cash or, at the holder’s option, in shares of stock.
All principal and interest due owed is convertible into shares, at any time at the election of the holder, at a conversion price equal to the lower of $0.50 or:
- 82.5% of the average of the three lowest daily volume weighted average price (VWAPs) in the 15 trading days prior to the conversion date (if TRTC files an S-1 with the SEC that becomes effective on or before August 25, 2016)
- 81% of the average of the three lowest daily volume weighted average price (VWAPs) in the 15 trading days prior to the conversion date (if the S-1 has not become effective by such date).
Should an event of default occur, the conversion price will automatically become the average of the three lowest daily volume weighted average price (VWAPs) in the 15 consecutive trading days prior to the conversion date as long as the event of default remains in effect. The conversion price is subject to adjustment for stock splits, stock dividends, combinations, or similar events and full ratchet anti-dilution protection.
TRTC may prepay any portion of the outstanding principal amount of any note and any accrued and unpaid interest by, upon 10 days’ notice, paying
- 110% of the then-outstanding principal amount of that note, if the prepayment date is within 90 days of issuance
- 115% of the then-outstanding principal amount of that note, if the prepayment date is between 91-180 days of issuance
- 125% of the then-outstanding principal amount of that note, if the prepayment date is within 90 days of issuance.
- In the event of default, 130% of the outstanding principal amount of the defaulted note and accrued but unpaid interest
Pursuant to the terms of the agreement, TRTC agreed to grant a series of warrants (4-year term) to purchase up to that number of shares equal to 25% of the principal amount of the notes issuable at the applicable tranche divided by the conversion price of the applicable note. The per-share exercise price of the warrants is $0.50, subject to certain adjustments for stock splits, stock dividends, combinations, or similar events and certain dilutive issuances.
Technical420 is favorable on this announcement because it provides Terra Tech with the capital needed to execute on its business initiatives.
Although the company received the capital, the terms could have been better, and a sub-par execution will be brutal for shareholders as shares can be converted and sold. TRTC is trading at $0.323 after falling 2.1% yesterday and the shares found support at $0.30.