TURV Two Rivers Water and Farming Company (CE)

ITEM 1. BUSINESS

Overview

“As water becomes ever more scant the world needs to conserve it, use it more efficiently and establish clear rights over who owns the stuff.” – Liquidity Crisis, The Economist, Nov 5, 2016

Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. In October 2016 we began to focus on monetizing our assets by investing strategically in assets that we believe offer opportunities for significant future returns for our shareholders and by selling those assets we determine will not yield those returns. As the result of that process, the management of water has become our core business., Our water asset total drainage area spans over 1,500 square miles and drops in elevation from over 14,000 feet to 4,500 feet at the confluence of the Arkansas River, just east of Pueblo, Colorado. We operate in a natural, gravity fed water alluvial, which is is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors. Our water development operations and strategy are described below under “─Our Water Operations.”

Our principal investments since commencing operations in 2009, and the status of those investments following the implementation of our monetization strategy in 2016, are described below:

Our Water Operations

Colorado allocates water based on the Prior Appropriation Doctrine, whereby water rights are unconnected to land ownership. The first person to use a quantity of water from a water source for a beneficial use has the right to continue to use that quantity of water for that purpose. Subsequent users can use the remaining water for their own beneficial purposes provided that they do not impinge on the rights of previous users. Water rights can be developed, managed, purchased and sold much like real property, and the seniority of water rights are a significant consideration when we acquire additional irrigated farmland. Water rights include the ability to divert stream flow , build a storage reservoir, pump ground water and create augmentation water supplies to offset depletions of water taken out of priority.

Since 2009 we have acquired a portfolio of water rights in the Arkansas River Basin in connection with our purchases of irrigated farmland. With our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate from use in irrigating our farmland, that could benefit our stakeholders, including our shareholders and the communities near where our water assets are located.

As a result of that investigation, we made water management our top priority. We believe there are several opportunities to capitalize on water assets that we currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following within the local communities we serve:

Our principal water rights include the following:

An acre-foot, or A.F., of water is the amount of water required to cover one acre to a depth of one foot. An acre-foot of water contains 325,851 gallons, generally considered enough water to supply two average households for a year. Annual irrigation in Southeastern Colorado, depending on the crops, consumes approximately three to six acre-feet of water per acre of crop.

By capturing water in reservoirs and releasing it later for irrigation purposes, we are able to retime the delivery of water throughout the irrigation season and ameliorate some of the inconsistencies of seasonal and annual water availability for the farmland we manage.

Surface Water Rights

Tributary ground water is any underground water that is hydraulically connected to a stream system and that influences the rate or direction of flow in that stream system. Any new ground water diversions that are tributary to an over-appropriated stream system require augmentation to offset out-of-priority depletions. In 2013, many well water users on the Arkansas River and its tributaries were unable to use their wells, as drought conditions made augmentation water unavailable. In response, an augmentation provider requested that we assist in building a more efficient and plentiful augmentation supply. We had intended to assist with an augmentation supply, but due to capital requirements, we terminated those plans.

We own the following surface water rights:

“Consumptive use” is the term for the portion of a water diversion right that is actually consumed by its beneficial use. Where the beneficial use is agricultural irrigation, consumptive use represents the amount of water consumed by the irrigated crop or evaporated on the farm. After deducting consumptive use from the amount of water diverted and applied to irrigation, the remainder is described as “return flow” to the system. Such return flows are generally subject to appropriation downstream. Only the consumptive use portion of a given water right is subject to transfer (that is, a change in the point of diversion, place of use, or purpose of use). Therefore, water rights are often assigned monetary value based on the consumptive use portion. Although consumptive use varies by crop, rainfall, temperature and other factors, in southeastern Colorado, crops generally consume about two acre-feet of applied water for each acre planted, depending on the crops planted. In order to provide that amount of consumptive use water, an irrigator must generally apply three acre-feet of water (allowing for predictable return flow equal to about one-third of the applied water). We measure our water rights both in terms of the amount of the diversion or storage right, as the case may be, but also in terms of the historic consumptive use.

Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation in the Colorado Division 2 Water Court concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. ( Two Rivers Water and Farming Co. vs. Welton Land and Water Co ., (Pueblo Water Court)).  As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful.  We also intend to work with the Colorado State Engineer to construct a new dam close to the prior dam structure, pending financing.  In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State's claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level by March 31, 2018.  Two Rivers has been able to empty all the water in the Dam, but it will not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.  Two Rivers intends to defend against the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive.  A hearing has been set for the contempt proceedings on May 10, 2018.

As part of our comprehensive water system we utilize storage reservoirs and ditches. Reservoirs allow water owners to store their water and plan the water’s distribution throughout the growing season. We currently own reservoirs associated with HCIC and Orlando. The development and improvement of storage reservoirs in the area will allow us to offer storage to other water users in the area for a storage leasing fee. Through water exchanges and other water-related transactions, the reservoirs can potentially increase and strengthen our existing water rights.

All of our reservoirs are used for irrigation in a similar manner to other reservoirs in the region, with the exception of Pueblo Reservoir, which was also constructed for flood control. Direct flow rights generally are senior to most storage rights but typically do not divert early in the spring when storage rights fill. The Arkansas River below Pueblo Reservoir operates a Winter Storage Program that re-allocates winter direct flow rights to storage in reservoirs from November 15 to March 15 each year.

Because our water rights and operating structures are located at succeeding elevations in the watershed, the system moves water supplies from point of diversion, through storage, to place of use primarily by means of gravity, making our more economical to operate than systems requiring energy to pump water for beneficial use.

In order to use these rights and structures most efficiently, we have planned and begun to implement a program of renovation and integration. For example, we began construction of new outlet works for the 1905 Orlando Reservoir in November 2011. The work was completed and successfully tested in February 2012, approximately a year after we acquired Orlando. Also in February 2012, we commenced reconstruction of the diversion structure, which takes water from the Huerfano River for storage in the Orlando reservoir, and to irrigate our nearby farmland. Additional water facility renovation projects are planned on a phased basis as necessary to provide reliable irrigation for agricultural operations and eventually commercial use.

We currently have the operable right to store 5,000 acre-feet of water within the Huerfano and Cucharas Rivers watershed in three separate reservoirs, subject to repair, or removal and rebuilding, limitations. When our reservoirs on the Huerfano and Cucharas Rivers have been fully restored, we will have the operable capacity and legal right to store in excess of 70,000 acre-feet of water. Similarly, based on our portfolio of water rights, we have the right to divert from the natural flows of the two rivers in excess of 90 cubic feet per second. Seasonal variability in the natural flow of the rivers, as well as the priorities of other water users in the system, limits our ability to divert the decreed amounts of water on a continuous basis. Our current water rights produce a long-term average annual diversion of 15,000 acre-feet of water.

The 15,000 acre-feet average is based on a record period of more than 50 years and also relies on historic studies of these rights by a variety of engineers at various times. It is common practice within the water industry in Colorado to use long periods of time to create reliable averages of water flow. We believe that using averages relating to only recent years can be misleading because an average could be skewed if only one of those years was particularly dry or wet. For example, in three out of the last ten years, there has been an extreme drought in our area of operations. Due to this drought condition, our flow averages for the most recent ten, five and three years are 8,200 acre-feet, 10,500 acre-feet and 10,400 acre-feet, respectfully. A similar request for the same averages for the decade beginning in 1980 would result in averages of 5,900 acre-feet, 18,500 acre-feet and 17,200 acre-feet. During 2017, which was a wet year, an estimated 50,000 acre-feet flowed through the Cucharas dam site. Normal flow through the Cucharas is approximately 22,000 acre-feet per year.

New Strategic Initiative

With our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate from use in irrigating farmland, that could benefit our stakeholders, including our shareholders and the communities near where our water assets are located. On September 30, 2016, our board of directors established a board-level task force to identify opportunities for our existing water assets, and perhaps acquired water assets. As a result of that investigation, water is a new top-priority for our Company.

Based on findings from our water task force, we believe we have several opportunities to capitalize on water assets that we currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following:

Our Greenhouse Operations

With the legalization of recreational marijuana usage in Colorado in 2012, we identified the potential use of certain of our farmland for lease to licensed marijuana growers. In May 2014, we formed GrowCo to focus and lead our efforts to take advantage of the rapidly growing demand for marijuana, both medical and recreational, within the state of Colorado.

Presently the majority of Colorado marijuana is grown in converted warehouses. Sophisticated growers understand that a warehouse production facility is not the most ideal for production. This has given rise to a strong demand for greenhouse space for marijuana production. Early estimates show a greenhouse can produce at least twice the amount of product at less than 50% of the cost compared to warehouse production. However, there are only a limited number of counties in Colorado that allow for new greenhouse construction. New construction needs to be tied to water supply. Pueblo County, where we have the majority of our land and associated water rights, allows for new greenhouse construction for lease to marijuana growers.

GCP1 – First Greenhouse

On January 20, 2015, GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land. TR Capital and GrowCo own all of the outstanding common shares of GCP1, and GCP Super Units and financial investors own all of the outstanding preferred shares of GCP1.

The first greenhouse facilities were leased to Suncanna, LLC, or Suncanna, and were occupied in September 2015 with lease revenue accrued beginning September 1, 2015. In 2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:

Pending the eviction of Suncanna, on August 4, 2016 GCP1 entered into a lease agreement with a related party Johnny Cannaseed, LLC, or Johnny Cannaseed, which is owned predominantly by our former Chief Executive Officer John McKowen. Under the terms of the lease, one half of the GCP1 greenhouse was sublet to a licensed marijuana grower on December 1, 2016. The second half of the greenhouse was leased to a second licensed marijuana grower on March 1, 2017. At December 31, 2016 we had recorded lease receivables of $240,000 from Johnny Cannaseed.

Johnny Cannaseed was not able to obtain a license to grow marijuana. Therefore, Johnny Cannaseed subleased, with the approval of GCP1’s board, to two tenants. In 2017 GCP1 expended $308,000 to divide the greenhouse into two areas referred to as GCP1-1 and GCP1-2. As reported by Johnny Cannaseed, for 2017 the GCP1-1 tenant paid to Johnny Cannaseed $620,000, which in turn was paid to GCP1. The GCP1-2 tenant did not pay any rent and was subsequently evicted by Johnny Cannaseed. Johnny Cannaseed has advised us it is seeking to collect back due rent from the GCP1-2 tenant. GCP1 is working with Johnny Cannaseed on how funds will be shared, if any collection occurs. For 2017 our consolidated income only recognizes the actual rent received of $620,000.

GCP2, LLC – Second Greenhouse

Our second greenhouse project is being developed by GrowCo Partners 2, LLC, or GCP2, a subsidiary of GrowCo, with the intention of leasing to licensed marijuana growers. This project will consist of a 90,000 square foot greenhouse, a 15,000 square foot processing and warehouse facility, and an extraction facility on 40 acres of land within our Pueblo grow complex. The GCP2 greenhouse structure was ordered in 2015 and construction began in January 2016. During 2016 and 2017, GCP2 raised capital for completion, but has additional capital to raise before GCP2’s greenhouse can be completed, which completion is unknown, subject to additional capital to be raised. Our construction costs for the GCP2 greenhouse totaled $3.4 million through December 31, 2017. We estimate that an additional expenditure of $3.0 million will be required to complete construction. For a summary of financing activities in connection with the GCP2 greenhouse, please see “—Liquidity and Capital Resources”.

On August 4, 2016 GCP2 entered into a lease agreement with Johnny Cannaseed. Under the terms of that agreement, rent will begin when the greenhouse is completed and ready for occupancy. If Johnny Cannaseed remains without a license to grow marijuana, then it is anticipated that Johnny Cannaseed and GCP2 will terminate the lease and obtain another grower or growers for the GCP2 facilities.

Our Organizational Structure

Since commencing operations as a farming and water company in 2009, we have built an organizational structure that enabled us to raise capital for specific projects completed by our direct and indirect subsidiaries.

In January 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations. We formed TR Capital Partners, LLC or TR Capital, which issued all of its common units to the Two Rivers. In a series of transactions from January to September 2014, TR Capital entered into Membership Interest Purchase Agreements pursuant to which it issued and sold a total of 30,158,815 preferred units to investors in exchange for consideration comprised of $6.0 million in cash and $18.9 million of outstanding equity and equity-related securities of our subsidiaries other than HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company.

The TR Capital Partners Limited Liability Company Agreement dated as of January 31, 2014 provides that holders of preferred units generally will be entitled to receive distributions each fiscal year in an amount equal to the lesser of (a) 12% of the preferred unit holders’ aggregate capital contributions and (b) TR Capital’s Adjusted Gross Margin (as defined) for such fiscal year. Regardless of TR Capital’s operating results, however, preferred unit holders are entitled to a minimum distribution for each full fiscal year equal to 8% of their aggregate capital contributions, payable in equal quarterly installments. If TR Capital’s Adjusted Gross Margin for a fiscal year is less than 12% of the preferred unit holders’ aggregate capital contributions, the shortfall will not be payable in any subsequent fiscal year. Distributions for fiscal year 2014 for each preferred unit were prorated for the portion of the year that the preferred unit was outstanding.

Pursuant to an Exchange Agreement dated as of January 31, 2014 entered into with TR Capital and Two Rivers, any holder may surrender a TR Capital preferred unit to Two Rivers at any time for consideration consisting of (a) accrued but unpaid preferred distributions on the preferred unit through the exchange date, (b) one share of common stock and (c) a warrant to purchase an additional one-half share of common stock at a price of $2.10 per share. TR Capital may require (with limited exceptions) each of its outstanding preferred units to be surrendered to Two Rivers in exchange for such consideration at any time after January 31, 2017, at which (1) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange for a closing price of at least $3.00 and (b) a registration statement filed by us with the SEC is effective with respect to the shares of common stock, including shares purchasable pursuant to warrants, issuable upon such exchanges. Each warrant issued upon any such exchange generally will be exercisable at any time on or before January 31, 2019, subject to our right to redeem the warrant at any time after January 31, 2017, at which (A) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange for a closing price of at least $3.00 and (B)  a registration statement has been filed and is effective with respect to the shares of common stock issuable pursuant to such warrant. Under the Exchange Agreement, Two Rivers also granted holders of preferred units one-time demand registration rights under which Two Rivers may be required to file a registration statement covering shares of common stock (including shares subject to warrants) issued or issuable upon exchanges of TR Capital preferred units. As of March 21, 2017, Two Rivers could be required under Two Rivers to issue and deliver to holders of outstanding TR Capital preferred units, upon exchange, up to 29,963,378 shares of common stock together with warrants to purchase up to an additional 14,168,944 shares of common stock. If Two Rivers receives any TR Capital pursuant to exchanges under the Exchange Agreement, it would be entitled to receive distributions on those preferred units pro rata with other holders of preferred units.

Following the completion of those transactions in September 2014, TR Capital and Two Rivers’ other direct and indirect subsidiaries (excluding HCIC Holdings, LLC and HCIC) entered into a series of related transactions as the result of which control and operation of those other subsidiaries and their businesses transferred to TR Capital, which is the operational division of Two Rivers. On February 16, 2017, Two Rivers’ formed Water Redevelopment Company, a Delaware Corporation. The following chart shows a high level view of our corporate organization as of March 30, 2018. For a more detailed description of ownership structure please refer to exhibit 21.1 filed herewith.

Corporate Information

Two Rivers’ is a Colorado corporation with principal executive offices at 3025 S Parker Rd, Suite 140, Aurora, Colorado, 80014 and our telephone number at that address is (303) 222-1000. Our website address is www.2riverswater.com . The information on our website is not part of this report.

Competition

Water

The rights to use water in Colorado have been fully appropriated to beneficial uses (such as agriculture irrigation and municipal and industrial applications) under court decrees and state regulation according to the prevailing Prior Appropriation Doctrine in which more senior (older) water rights take precedence in times of shortage over junior (newer) water rights. Notwithstanding significant conservation, growth in Colorado with related incremental demands for water has made the rights to divert, convey, store and use water relatively scarce and valuable. There is significant competition for the acquisition and beneficial use of historic water rights. Many competitors for the acquisition of such rights have significantly greater financial resources, technical expertise and managerial capabilities than we do and, consequently, we could be at a competitive disadvantage in assembling, developing and deploying water assets required to support our businesses. Competitors’ resources could overwhelm our efforts and cause adverse consequences to our operational performance. To mitigate such competitive risks, we concentrate our efforts in the Huerfano and Cucharas Rivers watershed where our local knowledge and control of a portfolio of water rights, storage facilities, distribution canals and productive farmland creates a somewhat protected geographic niche. To further mitigate competitive risk, we strive to actively engage with both the farming and municipalities in southeastern Colorado to explore strategies for cooperatively addressing challenges and opportunities faced by those communities—particularly to address the 130,000 acre-foot shortfall in water supplies on the Front Range, without taking valuable farmland out of production.

Leasing

There are a significant number of providers of facilities to lease to cannabis growers. Some are better capitalized than GrowCo. A significant portion of the facilities offered for lease are enclosed, warehouse space. Through GrowCo’s development of state-of-the-art greenhouses, GrowCo believes that it offers a competitive advantage to lessees of warehouse space in terms of increased production (estimated to be three times the growth) and a significantly reduced cost of production (estimated at one-third the cost). Therefore, GrowCo’s main leasing competition are other greenhouse structures offered to lease to cannabis growers. While there could be other large greenhouses for marijuana growing operations, ee are aware of only one other similar size greenhouse in the front range of Colorado. This facility is owned by the same owners of medical and retail outlets. Therefore, they are only growing product for their consumption. There are numerous other small greenhouses and others that are planned, which may be competition for our greenhouses.

Regulation

Water

Background

The right to water in Colorado is a right that can be developed, managed, purchased or sold much like real property subject to appropriate regulation. Water rights are judicially decreed and, under Colorado’s application of the Prior Appropriation Doctrine (“first in time, first in right”), senior water right holders are entitled to the beneficial use of water prior to junior holders. Consequently senior water rights are more consistent, reliable and valuable than junior rights, which may be interrupted, or “called out” in the parlance of Colorado water administration.

Along the Front Range of Colorado, water is a scarce and valuable resource. Natural precipitation varies widely throughout the year and from one year to another. Rivers, which fill, and sometimes flood, with the spring melt from the mountain snowpack, may be refreshed only with the occasional thunderstorm in the heat of the summer growing season. Annual precipitation also varies between surplus and drought. Additionally, the large majority of Colorado’s population resides on the Front Range (east of the Continental Divide) while the large majority of the state’s precipitation falls on the Western Slope (west of the Divide). Over time, many communities, farms and enterprises developed trans-mountain diversions to bring more water to the Front Range. Precipitation on the Front Range, and water diverted from the Western Slope, drain to the Mississippi River through the South Platte and Arkansas Rivers. Water on the Western Slope drains through the Colorado River. All of the state’s rivers are administered pursuant to interstate compacts with neighboring states. As a result of the variability of Colorado’s hydrology, its arrangements for diversions, storage and beneficial use, and its obligations to downstream states, Colorado has developed an integrated and complex water rights administration system.

In Colorado and the Western United States, the right to use water is based on the Prior Appropriation Doctrine, which is often referred to as “first in time, first in right.” Under this doctrine, water use is allocated to satisfy the oldest (“most senior”) water right before water is allocated to the next water right in historic chronology (a “junior water right” in comparison to a water right perfected earlier). Moreover, in Colorado, water rights and their relative priorities are protected by judicial decrees and are administered by the Office of the State Engineer, or the State Engineer, within the Colorado Department of Water Resources. The ability to consistently irrigate farmland, and thus avoid the inconsistencies of rainfall, is therefore tied to the relative seniority of historic water rights. Two Rivers is focused on developing irrigated farmland and maximizing beneficial use of the water rights associated with that farmland.

To manage water uses according to the Prior Appropriation Doctrine, Colorado maintains both judicial oversight through regional water courts and administrative oversight through the State Engineer. Water rights claims are filed in the court, adjudicated as necessary to resolve any adverse claims, and then decreed though an enforceable judgment. The State Engineer is charged with administering the accorded priorities among the various water rights in each of the state’s river systems.

Colorado water law further recognizes two distinct but related prior appropriative rights: direct diversion rights and storage rights. Direct diversion rights permit a user in priority to divert water directly from the river for immediate beneficial use (such as irrigation); storage rights permit a user in priority to divert water from the river and impound the water in a reservoir to re-time the water for later beneficial use. Thus, in Colorado, a direct diversion right must be conveyed to an immediate use; it cannot be stored without a storage right. As a result, both types of appropriative rights are often paired, when possible, so that in priority diversion rights can be re-timed through the exercise of a companion storage right to address seasonal and year-to-year variability in natural supplies. The older the appropriation date of any water right, the more reliable is its yield; similarly, the more effectively a senior diversion right is paired with a senior storage right, the more reliable each becomes.

Administration of Water Rights

In addition to the intra-state administration of water flowing in its rivers, Colorado also has inter-state water administration responsibilities because each of its major rivers (the Colorado, the North Platte and the Arkansas) is governed as well by interstate compacts with downstream states. These compacts are subject to judicial review, interpretation and enforcement under the original jurisdiction of the U.S. Supreme Court to resolve disputes among the states. In 1948, Colorado and Kansas reached an agreement that apportioned the water of the Arkansas River; Colorado was apportioned 60% of the water while Kansas is apportioned 40% of the River’s flow. In order to comply with Colorado’s obligations under the Arkansas River Compact, therefore, water rights on the Arkansas and its tributaries (including the Huerfano and Cucharas Rivers) are administered to assure the compact-required water flows at the Colorado-Kansas state line. When necessary, Colorado’s in-state uses are curtailed, in reverse order of priority, to assure compliance with the compact.

The interstate compacts (beginning with the Colorado River Compact of 1922) increased Colorado’s need to manage its apportioned water to meet the needs of its growing population along the Front Range. Trans-basin diversions (primarily tunnels and canals) were developed, under the Prior Appropriation Doctrine, to divert water from one watershed for conveyance to and use in another. Mainly, water from the Colorado River Basin, west of the Continental Divide, was diverted east to meet the water needs along the earlier developing Front Range by so-called “conservancy districts”. These projects began in the 1930’s and, although many have been in operation for decades, some remain incomplete. Increasingly, further trans-basin diversions are limited not only by competing appropriative water rights in the basins of origin but also by increasingly stringent environmental restrictions.

Stymied in their attempts to import additional surface water from distant watersheds, some municipalities and water providers began to rely on inherently unsustainable ground water “mining” (depleting aquifers for current consumption at a rate in excess of the rate at which natural recharge occurs). After decades of such ground water mining, many of the aquifers on the Front Range have been severely depleted. Some municipalities also purchased farms with water diversion rights and then ceased irrigating the farmland, transferring the water to their urban uses. Because neither the practice of ground water mining nor the practice of “buying up and drying up” farmland is sustainable, Colorado law has placed limits and regulations on both practices.

Recognizing the need for additional water sources along the Front Range, the Colorado Water Conservation Board published its 2050 Municipal and Industrial Gap Analysis in 2011 . This report estimates that the Arkansas and South Platte Basins (essentially the Front Range) will have a combined average annual supply shortage of 130,000 acre-feet of water by 2050. The difficulty and expense of incremental trans-mountain diversions coupled with the unsustainability of ground water mining and agricultural-to-urban transfers—as documented by the Colorado Water Conservation Board—motivates Front Range water purveyors to address the projected gap and to identify and develop inherently scarce renewable sources of water.

As early as 2005, the Colorado General Assembly created basin roundtables to convene regional water purveyors to address the looming municipal supply gap. The roundtables were charged to identify “projects and methods to meet the consumptive and non-consumptive needs of the basin.” (Colorado House Bill 05-1177). The potential solutions include Identified Plans and Process or IPPs, Conservation, New Supply Development, and Alternatives to Agricultural Transfers.

The Arkansas River Basin Roundtable has only a few IPPs to meet the water supply gap identified in its basin. The most significant of the Arkansas Basin IPPs is the Southern Delivery System, an $800 million, 62-mile water supply pipeline and associated pumping plants currently under construction by a consortium of four regional water purveyors including Colorado Springs. These purveyors will use a portion of the capacity in the Southern Delivery System to transport water made available to each of them under their respective contracts with the U.S. Bureau of Reclamation. The Southern Delivery System connects the U.S. Bureau of Reclamation’s Pueblo Reservoir on the Arkansas River, the point of delivery under the U.S. Bureau of Reclamation contracts, with the purveyors’ service areas

In order to address a portion of the identified gap between forecast supply and demand within the Arkansas Basin and to provide a substitute source of water for Front Range communities that are too reliant on depleted ground water aquifers, the design and planning for the Southern Delivery System anticipate that other water purveyors will subscribe for pipeline capacity to transport renewable water supplies to their service areas.

Leasing to Cannabis Growers

As of December 31, 2017, 29 states and the District of Columbia allowed their residents to use medical marijuana and voters in the States of Colorado, Washington, Oregon, Alaska, California, Nevada, Maine, Massachusetts and the District of Colombia have approved and implemented regulations to legalize cannabis for adult use.

These state laws are in conflict with the Federal Controlled Substances Act, which classifies marijuana as a Schedule I controlled substance and makes marijuana use and possession illegal on a national level. The U.S. Supreme Court has ruled that the federal government has the right to regulate and criminalize marijuana, even for medical purposes, and thus federal law criminalizing the use of marijuana preempts state laws that legalize its use. The Trump administration has made numerous statements indicating that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. However, the Trump administration could change its policy regarding the low-priority enforcement of federal laws and the succeeding administration could decide to enforce the federal laws more stringently.

The development of the GrowCo business model of constructing and leasing greenhouse space to licensed marijuana growers in states where growing marijuana is legal is dependent on Colorado marijuana laws remaining in force and federal laws not being enforced. If Colorado marijuana laws were not to remain in force or if federal marijuana laws were to be enforced, then GrowCo greenhouses could be used to grow organic fruits and vegetables, in which case we estimate the cash flow to GrowCo would decrease by approximately 75% but would still be positive.

Employees

At March 21, 2018, we had three full-time employees, of which two are employed at our Aurora headquarters and one works remotely from Pueblo and Huerfano County area as our ditch manager. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Available Information

We file reports with the SEC, which we make available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file it with the SEC. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.