PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus. Because the following is only a summary, it does
not contain all of the information you should consider before investing in the common stock. You should carefully read this entire
prospectus, including the risks set forth under “Risk Factors” and the other information included in this prospectus,
before making an investment decision.
Our
Company
Since
2009 we have invested in acquiring and developing irrigated farmland and associated water rights and infrastructure. We seek to
use our land and associated water to create revenue streams. Our business currently consists of two core operations: (1) development
and leasing of our water assets and (2) construction and leasing of greenhouses for cannabis growers.
Water
Since
2009 we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado. We own
a portfolio of water rights in the Arkansas River Basin that we obtained in connection with our purchases of irrigated farmland.
Our water asset 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 that is the last undeveloped
basin along the front range of Colorado.
Water
rights can be developed, managed, purchased and sold much like real property, and the seniority of water rights is a significant
consideration when we acquire 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. Our current water
rights produce a long-term average annual diversion of 15,000 acre-feet of water.
Based
on an investigation conducted by our board of directors, we have identified 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:
|
●
|
We
will seek to address the need for municipal water storage.
|
|
●
|
We
believe there are a variety of opportunities to lease, both short term and long term,
our water assets.
|
|
●
|
We
have identified underutilized land that, along with the water we own, that can be leased
to agricultural activities.
|
|
●
|
We
plan to execute on a water supply agreement we entered into in January 2011 with a real
estate development company in Huerfano County by beginning to supply raw water for water
taps.
|
In
February 2017 we formed a subsidiary, Water Redevelopment Company or Water Redev, to separate our water assets from the rest of
our business and to facilitate raising capital solely for our water operations. Water Redev will develop and redevelop infrastructure
for water management and delivery. As its first project, Water Redev plans to fully develop the Huerfano-Cucharas river basin
in southeastern Colorado in order to manage the water contained therein for the benefit of our investors and our local community.
Greenhouses
With
the legalization of recreational marijuana usage in Colorado in 2012, we identified the potential use of some of our farmland
for lease to licensed marijuana growers. Presently over 80% of Colorado marijuana is grown in converted warehouses. Sophisticated
growers understand that a warehouse production facility is not ideal for cannabis production. This has given rise to a strong
demand for the use of 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. Additionally, new construction of greenhouses needs to be
tied to water supply. Pueblo County, where the majority of our land and associated water rights are located, allows for the lease
of new greenhouse construction to marijuana growers.
In
May 2014 we formed a subsidiary, GrowCo, Inc. or GrowCo, to conduct our efforts to take advantage of the rapidly growing demand
for marijuana, both medical and recreational, within the State of Colorado. GrowCo constructs state-of-the-art computer-controlled
greenhouses for leasing to licensed marijuana growers throughout the United States. GrowCo is not a licensed marijuana grower
or retailer. GrowCo does not “touch the plant” and only provides growing infrastructure as a landlord for licensed
marijuana grower tenants along with support and administrative services. GrowCo currently operates in Colorado, but intends to
expand its operations into other states.
Corporate
Information
We
were incorporated under the laws of the State of Colorado in December 2002. Our headquarters are located at 3025 S. Parker Road,
Suite 140, Aurora, Colorado 80014, where our telephone number is (303) 222-1000. Our website address is
www.2riverswater.com
.
The information contained on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.
We have included our website address in this prospectus solely as an inactive textual reference.
Issuance
of Convertible Promissory Note
On
February 9, 2018, we entered into a securities purchase agreement, or the SPA, with Powderhorn I, LP, or Powderhorn, pursuant
to which we issued to Powderhorn a 12.5% original issue discount convertible promissory note, or the Note, in the principal amount
of $675,000 in exchange for $600,000 in cash.
We
have filed the registration statement of which this prospectus is a part in order to register the resale of up to 8,000,000 shares
of common stock by Powderhorn that may be issued upon conversion of the Note. Under the SPA, we initially agreed to use our reasonable
best efforts to have the registration statement declared effective by the Securities and Exchange Commission, or SEC, by April
11, 2018. On April 2, 2018, Powderhorn agreed, effective upon a specified amortization payment we made on April 9, 2018, to defer
our obligation to have the registration statement declared effective until May 8, 2018. Subject to certain permitted exceptions,
if the SEC does not declare the registration statement effective by May 8, 2018 or if we fail to keep the registration statement
effective, we will be required to pay liquidated damages to Powderhorn.
The
Note, which is due on February 9, 2019, bears interest at the rate of 12.5% per annum. All principal of, and accrued interest
on, the Note is convertible at any time, at Powderhorn’s election, into shares of common stock at a conversion price equal
to $0.29. We have the right to prepay all or any portion of the Note at any time upon ten days’ written notice to Powderhorn.
For the purpose of securing our obligations under the Note, TR El Paso Land, LLC, our wholly owned subsidiary, granted a deed
of trust conveying certain property to Powderhorn and a limited recourse guarantee in favor of Powderhorn. The Note contains customary
default events that, if triggered and not timely cured, will result in default interest and penalties.
The
foregoing summary descriptions of the SPA and the Note do not purport to be complete and are qualified in their entirety by reference
to the full text of the SPA and the Note, each of which is filed as an exhibit to the registration statement of which this prospectus
is a part and incorporated by reference herein.
There
are substantial risks to investors as a result of our issuance of shares of common stock under the Note. Resales by Powderhorn
of shares issued upon conversion of the Note may cause dilution to existing shareholders and may result in a significant decrease
in the market price of the common stock. See “Risk Factors—Our issuance of common stock upon conversion of the Note
may result in significant decreases in our stock price and in dilution to existing shareholders.”.
Risks
Related to Our Business
Our
business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely
affect our business, financial condition, results of operations, cash flows or prospects. These risks are discussed more fully
in “Risk Factors” beginning on page 5. Before making a decision to invest in our common stock, you should carefully
consider all of those risks, including the following:
|
●
|
We
have incurred significant losses since our inception, have an accumulated deficit of
$97.2 million as of December 31, 2017, have generated limited revenue to date, and we
may not be able to attain profitability.
|
|
●
|
Based
on the limited operating history of our water assets, the operating performance and our
business strategy relating to our water assets are not yet proven and you may have difficulty
evaluating our ability to achieve our objectives.
|
|
●
|
One
segment of our business is dependent on demand for marijuana, which remains illegal under
federal law. Recent changes in the enforcement priorities of the federal government could
render our current and planned future operations unprofitable or even prohibit such operations.
|
|
●
|
We
will need additional capital in the future to finance our operations, which we may not
be able to raise or it may only be available on terms unfavorable to us or our shareholders,
which may result in our inability to fund our working capital requirements and harm our
operational results.
|
|
●
|
Our
success is particularly dependent upon Wayne Harding, our sole executive officer, and
the loss of Mr. Harding would significantly disrupt our operations and would have a material
adverse effect on our business.
|
Offering
This
prospectus relates to the resale from time to time by Powderhorn of up to 8,000,000 shares of common stock issuable upon conversion
of the Note. We are not offering any shares for sale under this prospectus.
Common
stock offered by selling shareholder
|
Up
to 8,000,000 shares
|
|
|
Common
stock outstanding prior to this offering
|
32,937,045
shares
|
|
|
Common
stock outstanding after this offering
|
40,937,045
shares
|
|
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of shares in this offering.
|
|
|
OTCQB
symbol
|
TURV
|
The
numbers of shares of common stock outstanding prior to and after this offering are based on shares outstanding as of March 31,
2018, and exclude the following as of March 31, 2018:
|
●
|
29,881,698
shares of common stock issuable upon conversion of preferred units of TR Capital Partners,
LLC (for additional information, please see “Business—Our Organizational
Structure”);
|
|
●
|
118,000
shares of common stock issuable pursuant to restricted stock units vesting without an
exercise price;
|
|
●
|
16,469,328
shares of common stock issuable upon exercises of outstanding warrants, with a weighted
average exercise price of $1.954 per share (for additional details, please see the description
under “Warrants” in Note 7, Equity Transactions, to the consolidated financial
statements included elsewhere herein);
|
|
●
|
3,036,500
shares of common stock issuable upon the exercise of outstanding options, with a weighted
average exercise price of $● per share; and
|
|
●
|
●
shares of common stock reserved for future issuance under our equity incentive plans.
|
Summary
Consolidated Financial Information
The
following tables summarize our consolidated financial data. You should read the following data in conjunction with “Selected
Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our consolidated financial statements and related notes included at the end of this prospectus.
|
|
Years
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands, except share
and per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Leasing
─Greenhouse
|
|
$
|
620
|
|
|
$
|
204
|
|
Other
|
|
|
72
|
|
|
|
68
|
|
Total
revenue
|
|
|
692
|
|
|
|
272
|
|
Direct
cost of revenue
|
|
|
(33
|
)
|
|
|
─
|
|
Gross
profit
|
|
|
659
|
|
|
|
272
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,078
|
|
|
|
3,711
|
|
Asset
impairment
|
|
|
6,900
|
|
|
|
─
|
|
Depreciation
and amortization
|
|
|
420
|
|
|
|
166
|
|
Total
operating expenses
|
|
|
9,398
|
|
|
|
3,877
|
|
Loss
from operations
|
|
|
(8,739
|
)
|
|
|
(3,605
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,616
|
)
|
|
|
(1,780
|
)
|
Warrant
expense
|
|
|
(331
|
)
|
|
|
(327
|
)
|
Other
income
|
|
|
33
|
|
|
|
17
|
|
Total
other income (expense)
|
|
|
(2,914
|
)
|
|
|
(2,090
|
)
|
Net
loss from continuing operations before taxes
|
|
|
(11,653
|
)
|
|
|
(5,695
|
)
|
Net
loss from discontinued operations
|
|
|
(1,045
|
)
|
|
|
(2,624
|
)
|
Net
loss before non-controlling interest
|
|
|
(12,698
|
)
|
|
|
(8,319
|
)
|
Net
income attributable to non-controlling interest
|
|
|
637
|
|
|
|
200
|
|
Net
loss
|
|
|
(12,061
|
)
|
|
|
(8,119
|
)
|
Preferred
shareholder distributions
|
|
|
(863
|
)
|
|
|
(2,608
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(12,924
|
)
|
|
$
|
(10,727
|
)
|
Loss
per common share─basic and dilutive
|
|
$
|
(0.40
|
)
|
|
$
|
(0.38
|
)
|
Weighted
average shares outstanding─basic and dilutive
|
|
|
32,118
|
|
|
|
28,147
|
|
|
|
As
of
December 30, 2017
|
|
Consolidated
Balance Sheet Data:
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
14
|
|
Working capital(1)
|
|
|
(24,707
|
)
|
Total
assets
|
|
|
38,152
|
|
Preferred
dividend payable
|
|
|
3,968
|
|
Total
indebtedness (including current portion of $17,419)
|
|
|
18,657
|
|
Total
liabilities
|
|
|
26,015
|
|
Total
stockholders’ equity
|
|
|
12,137
|
|
(1)
|
Working
capital is calculated as current assets less current liabilities.
|
RISK
FACTORS
Investing
in the common stock involves a high degree of risk. Before you decide to invest in the common stock, you should carefully consider
the risk described below. The following risks are not the only ones facing our company. Additional risks and uncertainties may
also impair our business operations. If any of the risks described occurs, our business, financial condition, results of operations
and future growth prospects could be harmed. In these circumstances, the market price of the common stock could decline, and you
may lose all or part of your investment.
Risks
Related to Our Business and Our Industry
We
can give no assurance of success or profitability to investors.
There
is no assurance that we will generate revenues or profits. We have not been profitable in the past and had an accumulated deficit
of $97.2 million as of December 31, 2017. We incurred net losses from continuing operations before taxes of $5.7 million in 2016
and $11.7 million in 2017. Our net losses attributable to common shareholders totaled $10.7 million in 2016 and $12.9 million
in 2017.
Our
success will depend, to a large degree, on the expertise and experience of our sole executive officer.
Effective
January 17, 2018, the board of directors appointed Wayne Harding, our chief executive officer, to also serve as our interim chief
financial officer. Mr. Harding is our sole executive officer. Our success in identifying investment opportunities and pursuing
and managing such investments will be, to a large degree, dependent upon Mr. Harding’s expertise and experience and his
ability to attract and retain quality personnel. We do not maintain a key person life insurance policy on Mr. Harding. The loss
of Mr. Harding would significantly delay or prevent the achievement of our business objectives. If Mr. Harding is unable or unwilling
to continue his employment with us, we may not be able to replace him in a timely manner and we will have no executive personnel
with experience operating our company. We may incur additional expenses to recruit and retain qualified replacements.
Our
current management resources may not be sufficient for the future, and we have no assurance that we can attract additional qualified
personnel.
There
can be no assurance that the current level of management is sufficient to perform all responsibilities necessary or beneficial
for management to perform. Our success in attracting additional qualified personnel will depend on many factors, including our
ability to provide them with competitive compensation arrangements, equity participation and other benefits. There is no assurance
that we will be successful in attracting highly qualified individuals in key management positions.
Any
default on mortgages relating to our water and greenhouse development could have a material impact on our farming business.
Our
water rights and facilities owned by our subsidiary GrowCo, Inc., or GrowCo, are subject to mortgages. If we default on a mortgage,
we could lose the underlying assets. Currently there is a complaint filed against GrowCo from a large holder of GrowCo’s
$4 million secured note for non-payment.
The
adequacy of our water supplies depends upon a variety of uncontrollable factors.
The
adequacy of our water supplies for farmland leased to others and municipalities varies from year to year depending upon a variety
of factors, including:
|
●
|
rainfall,
runoff, flood control and availability of reservoir storage,
|
|
●
|
availability
of water in the Arkansas River watersheds,
|
|
●
|
the
amount of useable water stored in reservoirs and ground water basins,
|
|
●
|
the
amount of water used by our customers and others,
|
|
●
|
legal
limitations on production, diversion, storage, conveyance and use.
|
Population
growth and increases in the amount of water used in urban areas have caused increased stress on surface water supplies and ground
water basins.
We
obtain our water supply from the Cucharas and Huerfano Rivers. Our water supply and storage may be subject to interruption or
reduction if there is an interruption or reduction in water supplies available to us. Our supply and storage business is dependent
upon our ability to meet the requirements of the Colorado Water Engineer’s office regarding our water rights priorities.
Water
shortages may:
|
●
|
adversely
affect our supply thereby limiting our revenue, or
|
|
●
|
adversely
affect our operating costs, for instance, by increasing the cost to purchase or lease
required water if we are obligated to supply water under a lease agreement.
|
Our
water rights may not yield full flow every year.
Water
rights in Colorado are subject to the Prior Appropriation Doctrine, which accords lower priority to junior water rights. Water
rights that are senior (such as our Butte Valley Ditch Right Number 1 dating from 1862) have priority over junior rights (such
as our Huerfano Valley Ditch Right Number 342 dating from 1905) as to use in dry years, and junior rights may not get water or
as much water as they wish, if senior rights use it all.
We
may be subject to periodic litigation and other regulatory proceedings. These proceedings may be affected by changes in laws and
government regulations or changes in the enforcement thereof.
From
time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be in jurisdictions
with reputations for aggressive application of laws and procedures against corporate defendants. Some of these actions have the
potential for significant statutory penalties, and compensatory, treble or punitive damages. For example, on April 3, 2018, Two
Rivers was notified that the State of Colorado had filed a motion for the issuance of a contempt of court citation based upon
its failure to comply with a consent decree to bring the Cucharas #5 reservoir down to silt level by March 31, 2018. Moreover,
our greenhouse business in particular is subject to numerous federal laws that are in conflict with the State of Colorado and
local regulations, and a significant change in enforcement of federal laws could have a material adverse effect on our ability
of our tenants to operate the greenhouses and litigation costs and results of operations. Due to the inherent uncertainties of
litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable
outcome could have a material adverse impact on our business, financial condition, and results of operations. In addition, regardless
of the outcome of any litigation or regulatory proceedings, these proceedings could result in substantial costs and may require
that we devote substantial resources to defend our company. Further, changes in governmental regulations where we operate could
have adverse effects on our business and subject us to additional regulatory actions.
We
are required to maintain water quality standards and are subject to regulatory and environmental risks.
We
face the risk that our water supplies may be contaminated or polluted whether through our error or through actions by other agents
or through acts of God. In addition, normal farming practices, including the application of pesticides, herbicides and fertilizers,
introduce pollutants to waterways through irrigation water runoff. Improved detection technology, increasingly stringent regulatory
requirements, and heightened consumer awareness of water quality contribute to an environment of increased risk with the possibility
of increased operating costs. We cannot assure you that in the future we will be able to reduce the amounts of contaminants in
our water to acceptable levels.
Our
water supplies are subject to contamination, including contamination from naturally occurring compounds, pollution from man-made
sources and intentional sabotage. We cannot assure you that we will successfully manage these risks, and failure to do so could
have a material adverse effect on our future results of operations. We may not be able to recover the costs associated with these
liabilities through our sales or insurance or such recovery may not occur in a timely manner.
The
water business is heavily regulated and, as a result, decisions by regulatory agencies and changes in laws and regulations could
significantly affect our business.
Regulatory
decisions may impact prospective revenues and earnings, affect the timing of the recognition of revenues and expenses, may overturn
past decisions used in determining our revenues and expenses and could result in impairment of goodwill. Management continually
evaluates the assets, liabilities and revenues and provides for allowances and/or reserves as deemed necessary.
We
may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations
or orders applicable to our water businesses.
Regulatory
agencies may also change their rules and policies, which may adversely affect our profitability and cash flows. We may also be
subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders
applicable to our water businesses. The water rights we control provide significant legal and pecuniary benefits. Any change in
Colorado law that affects water rights, either in general or specific to our company, could likely have a material impact on us.
We
operate in a highly competitive industry and potential competitors could duplicate our business model.
We
are involved in a highly competitive industry where we compete with numerous other companies who offer similar facilities to lease
to those we offer. There is no aspect of our business, which is protected by patents, copyrights, trademarks, or trade names.
As a result, potential competitors could duplicate our business model with little effort. Some of our potential competitors may
have significantly greater resources than we have, which may make it difficult for us to compete. There can be no assurance that
we will be able to successfully compete against these other entities.
Our
operations are geographically concentrated within Colorado.
Our
operations are concentrated in Southeastern Colorado. As a result, our financial results are subject to political impacts, regional
weather conditions, available water supply, available labor supply, utility cost, regulatory risks, economic conditions and other
factors affecting Colorado, our area of operation. Southeastern Colorado has been hard hit by the on-going economic crisis. Colorado
is raising taxes in order to balance the state budget and jobs may be lost to other states which are perceived as having a more
business friendly climate, thereby exacerbating the impact of the financial crisis in Colorado.
We
have substantial competitors who have an advantage over us in resources and management.
Most
of our competitors in the water resource management business have significantly greater financial resources, technical expertise
and managerial capabilities than us and, consequently, we may be at a competitive disadvantage in identifying and developing or
exploring suitable business opportunities and/or acquisitions. Competitors’ resources could overwhelm our restricted efforts
and adversely impact our operational performance.
The
inability to attract and retain qualified employees could significantly harm our business.
The
market for skilled executive officers and employees knowledgeable in water rights is highly competitive and historically has experienced
a high rate of turnover. Competition for quality officers and employees may lead to increased hiring and retention costs.
Additional
Risk Factors Relating to Our Greenhouse Business
Our
proposed greenhouse leasing business is dependent on state laws pertaining to the marijuana industry.
Continued
marijuana industry operations are dependent upon continued legislative authorization of marijuana at the state level. Any number
of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there is public
support for legislative support of marijuana laws, numerous factors could impact the legislative process. As of December 31, 2017,
29 states, the District of Columbia, Guam and Puerto Rico 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 Columbia had approved and
implemented regulations to legalize cannabis for adult use. The state laws are in conflict with the Federal Controlled Substances
Act, which makes marijuana use and possession illegal on a national level. More stringent enforcement of Federal law, as described
below under “—Marijuana remains illegal under federal law,” could cause the greenhouse leases to be terminated,
or even to be confiscated by the Federal government. If the greenhouses can no longer be used for marijuana production, we plan
to use the greenhouses for production of organic fruit and vegetables. This potential change of use would significantly reduce
the return of the capital invested in the greenhouses.
Marijuana
remains illegal under federal law.
Despite
the development of a legal marijuana industry under the laws of certain states, these state laws legalizing medical and adult
cannabis use 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 United States Supreme Court has ruled that it
is the federal government that 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. On January 4, 2018, U.S. Attorney General Jeff
Sessions issued a written memorandum rescinding previous federal guidance to the effect that it was 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. The memorandum redirected U.S. prosecutors to enforce the Federal Controlled Substances Act. It is unclear
at this time how strongly the federal law will be enforced and which activities will be targeted for enforcement. This significant
change in the Federal government’s enforcement policy may cause financial damage to our operations.
We
may be unable to develop the properties that are critical to our greenhouse business.
Our
business plan involves the acquisition and development of real estate properties and support services. These properties will be
used for our traditional irrigated farming business and the development of greenhouses, which will be leased to participants in
the marijuana industry. The zoning and operational restrictions on marijuana industry participants may limit the availability
of properties suitable for greenhouse development. While we have our Colorado property zoned for cannabis greenhouse production,
this zoning can be revoked if construction has not begun. Further, we may be unable to find suitable properties once we expand
outside of Colorado.
We
may be unable to expand successfully into new markets.
We
intend to aggressively pursue our greenhouse development to lease to licensed marijuana growers for the foreseeable future. This
expansion into new markets, particularly in states where we do not currently operate, may not succeed. This expansion may expose
us to new operational, regulatory or legal risks. In addition, expanding into new states may subject us to unfamiliar or uncertain
local regulations that may adversely affect our operations, for example, by applying, obtaining and/or maintaining appropriate
licenses. Facilities we open in new markets may also take longer to reach expected revenue and profit levels on a consistent basis
and may have higher construction, occupancy or operating costs than facilities we open in existing markets, thereby affecting
our overall profitability. New markets may have competitive conditions, consumer preferences and spending patterns that are more
difficult to predict or satisfy than our existing markets.
We
currently are leasing only one greenhouse, and we will be unable to operate our greenhouse business successfully if our sole active
tenant fails to meet its lease obligations or if our second greenhouse is not completed and leased in the foreseeable future.
Our
only currently operating greenhouse and warehouse are leased to a single tenant pursuant to a lease agreement dated February 1,
2018 that extends through August 31, 2020. If this tenant’s business operations fail or if it is otherwise unable to meet
its lease obligations, it might a long period before we could find a replacement tenant. Moreover, the tenant only occupies approximately
one-half of the greenhouse and we have not identified another potential tenant to lease the remainder of the greenhouse.
We
have leased our second greenhouse to another tenant, but the tenant will not take occupancy until if and when construction has
been completed and all regulatory approvals have been received. There can be no assurance as to the date, if any, as of which
this construction will be completed and approvals obtained by the prospective tenant.
The
leasing market for marijuana lessees could be volatile.
The
lease rate for our current tenant in the first greenhouse is $20 per square foot, triple net. The development and construction
cost for this 105,000 square foot greenhouse and facilities was approximately $65 per square foot. If we have to replace the current
tenant, or the prospective tenant in the second greenhouse, there can be no assurance that the greenhouses can be leased at the
same rate and for a long enough time period to recover our capital cost, thereby decreasing our returns.
Our
greenhouse lessees may not be able to fund lease and service payments.
If
GrowCo’s tenants incur unforeseen weather, negative crop events, or a major reduction of the price of marijuana, the tenant
may not be able to pay lease and service payments. This would cause a legal action to the eviction of the tenant and a search
for a new tenant, which may not be successful.
Our
future success depends on our ability to attract new greenhouse lessees.
Our
immediate plan is to construct additional greenhouses on a 160-acre plat. There is no assurance that our existing tenant will
lease the additional greenhouses or that we can attract new tenants.
Our
failure to obtain capital may significantly restrict our proposed greenhouse operations.
We
need capital to fund our greenhouse expansion. While we have been successful in accessing capital for the first greenhouse, we
do not know if future capital raising will be successful. Our failure to obtain the capital, which we require for greenhouse expansion,
may result in the slower implementation of our GrowCo business plan.
Tenants
of GrowCo may have difficulty accessing the service of banks, which may make it difficult for them to operate and remit payments.
Since
the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with
marijuana. Consequently, businesses involved in the marijuana industry often have trouble finding a bank willing to accept their
business. The inability to open bank accounts may make it difficult for potential tenants of GrowCo to operate. There may also
be an issue with GrowCo’s ability to deposit payments from its tenants.
Laws
and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our greenhouse
leasing operations.
Local,
state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these
laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.
Furthermore, it is possible that regulations may be enacted in the future that will be directly applicable to our leasing activities.
We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Risk
Factors Related to Ownership of Common Stock
We
may in the future issue more shares of capital stock, which could cause a loss of control by present management and current shareholders
and/or dilution to investors.
There
may be substantial dilution to our shareholders as a result of future decisions of the board of directors to issue shares without
shareholder approval for cash, services, or acquisitions at prices solely determined by the board. Additionally, upon issuance,
such shares could represent a majority of the voting power and equity of our company. The result of such an issuance would be
those new shareholders and management would control our company, and persons unknown could replace existing management at such
time.
Our
common shareholders could face substantial potential dilution from outstanding common stock equivalents.
As
of March 31, 2018, 32,937,045 shares of common stock were outstanding. As of that date, up to 57,505,526 additional shares of
common stock could be issued, as follows:
|
●
|
up
to 8,000,000 shares of common stock were issuable upon conversion of a 12.5% original
issue discount convertible promissory note issued to Powderhorn I, LP, which shares may
be offered and sold pursuant to this prospectus from time to time;
|
|
●
|
up
to 29,881,698 shares of common stock were issuable upon conversion of preferred units
of TR Capital Partners, LLC;
|
|
●
|
up
to 118,000 shares of common stock were issuable pursuant to restricted stock units vesting
without an exercise price;
|
|
●
|
up
to 16,469,328 shares of common stock were issuable upon exercises of outstanding warrants;
and
|
|
●
|
up
to 3,036,500 shares of common stock were issuable upon the exercise of outstanding options.
|
We
need additional capital in the future to finance our operations, which we may not be able to raise or it may only be available
on terms unfavorable to us or our shareholders, which may result in our inability to fund our working capital requirements and
harm our operational results.
We
have and expect to continue to have substantial capital expenditure and working capital needs. We do not now have funds sufficient
to fund our operations at their current level for the next 12 months. We need to raise additional cash to fund our operations
and implement our business plan. We are maintaining an on-going effort to locate sources of additional funding, without which
we will not be able to remain a viable entity. If we are able to obtain the financing required to remain in business, eventually
achieving operating profits will require substantially increasing revenues or drastically reducing expenses from their current
levels or both. If we are able to obtain the required financing to remain in business, future operating results depend upon a
number of factors that are outside of our control. The expected operating losses, coupled with a lack of liquidity, raise a substantial
doubt about our ability to continue as a going concern. If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders would be reduced, and these newly issued securities might have rights,
preferences or privileges senior to those of existing shareholders.
The
regulation of penny stocks by SEC and FINRA may discourage the tradability of common stock.
We
are classified as a “penny stock” company. The common stock currently trades on the OTCQB Market and is subject to
an SEC rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than
established customers or accredited investors. For purposes of the rule, the phrase “accredited investors” means,
in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000
(not including the principal residence) or having an annual income that exceeds $250,000 (or that, when combined with a spouse’s
income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination
for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Effectively, this
discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers
in this offering to sell their securities in any market that may develop therefore because it imposes additional regulatory burdens
on penny stock transactions.
In
addition, the SEC has adopted a number of rules to regulate “penny stocks,” including Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7 and 15g-9 under the Exchange Act. Common stock constitutes a “penny stock” within
the meaning of these rules, and these rules imposes additional regulatory burdens that may affect the ability of holders to sell
common stock in any market that may develop.
The
market for penny stocks has suffered in recent years from patterns of fraud and abuse, including:
|
●
|
control
of the market for the security by one or a few broker-dealers that are often related
to the promoter or issuer;
|
|
●
|
manipulation
of prices through prearranged matching of purchases and sales and false and misleading
press releases;
|
|
●
|
“boiler
room” practices involving high-pressure sales tactics and unrealistic price projections
by inexperienced sales persons;
|
|
●
|
excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
|
|
●
|
wholesale
dumping of the same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, causing investor losses.
|
We
cannot dictate or anticipate the behavior of the market or of broker-dealers who participate in the market.
Rule
144 sales of common stock in the future may have a depressive effect on our stock price.
Some
of the outstanding shares of common stock held by our officers, directors and affiliated shareholders are “restricted securities”
within the meaning of Rule 144 under the Securities Act of 1933. As restricted shares, these shares may be resold only pursuant
to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration
under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who has held
restricted securities for six months may sell without restriction, except for affiliates which, under certain conditions, may
sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company’s
outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. There is no limit
on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities
for a period of six months. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant
to subsequent registration of shares of common stock of current shareholders, may have a depressive effect upon the price of common
stock in any market that may develop. There may be substantial dilution to our shareholders as a result of future decisions of
the board of directors to issue shares without shareholder approval for cash, services or acquisitions at prices determined solely
by the board.
Our
stock is thinly traded and as a result shareholders may be unable to sell at or near ask prices or at all.
Shares
of common stock are thinly traded on the OTCQB market, meaning that the number of persons interested in purchasing common stock
at or near ask prices at any given time may be relatively small. This situation is attributable to a number of factors, including
the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume and that even if we came to the attention of such persons,
they may be risk-averse and reluctant to follow an early stage company or purchase or recommend the purchase of any of our securities
until such time as we became more seasoned and profitable. As a consequence, there may be periods of several days or more when
trading activity in our securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume
of trading activity that will generally support continuous sales without an adverse effect its securities price. We cannot give
you any assurance that a broader or more active public trading market for our common securities will be developed or sustained.
Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices
or at all if they desire to liquidate shares of common stock.
FORWARD-LOOKING
STATEMENTS
This
prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements
of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial
position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth, are forward-looking
statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “target,” “would” and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words. In addition, statements following the
words “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. The forward-looking
statements and opinions contained in this prospectus are based upon information available to us as of the date such statements
are made and, while we believe such information forms a reasonable basis for such statements at the time made, such information
may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into,
or review of, all potentially available relevant information. These forward-looking statements include, among other things, statements
about:
|
●
|
the
anticipated trends and challenges in our business;
|
|
●
|
our
potential market opportunities and anticipated growth strategies;
|
|
●
|
regulatory
developments in Colorado and the United States generally; and
|
|
●
|
other
risks and uncertainties, including those referenced in “Risk Factors” above.
|
We
may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not
place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements we make. New risks and uncertainties emerge from time to time, and
it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained
in this prospectus. We have included important factors in the cautionary statements in this prospectus, particularly in “Risk
Factors,” that could cause actual results or events to differ materially from our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures
or investments that we may make or enter into.
You
should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus
is a part completely and with the understanding that our actual future results may be materially different from what we expect.
We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events
or otherwise, except as required by law.
USE
OF PROCEEDS
We
are filing the registration statement of which this prospectus is a part to permit Powderhorn I, LP, or Powderhorn, to resell
shares of common stock acquired from us as described in “Principal and Selling Shareholders.” We are not selling any
shares of common stock under this prospectus, and we will not receive any proceeds from the sales of shares by Powderhorn. We
have, however, received proceeds from our sale of the 12.5% original issue discount convertible promissory note to Powderhorn,
which proceeds will be used for working capital and other general corporate purposes.
Powderhorn
will pay any underwriting discounts and commissions and expenses it incurs for brokerage, accounting, tax or legal services or
any other expenses it incurs in disposing of the shares covered by this prospectus. We will bear all other costs, fees and expenses
incurred in effecting the registration of the shares, including all registration and filing fees and fees and expenses of our
counsel and accountants.
DIVIDEND
POLICY
We
have never declared or paid cash dividends on the common stock. We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business. We do not intend to pay cash dividends in respect of the common stock in
the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors
and will depend on restrictions and other factors our board of directors may deem relevant, including our ability to generate
positive cash flows from operations. Investors should not purchase the common stock with the expectation of receiving cash dividends.
PRICE
RANGE OF COMMON STOCK
Our
common stock is traded on the OTCQB, an over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry
Regulatory Authority, or FINRA. Prior to that, there was no public market for the common stock. The common stock began trading
on the OTC Bulletin Board on September 17, 2007 under the symbol “NVDF.” In connection with a change in our corporate
name, the common stock began trading under the symbol “TURV” on October 13, 2010. As a result of changes in the over-the-counter
market, on October 13, 2010, the common stock began trading on the OTCQB under the symbol “TURV.”
The
following table sets forth the range of high and low bid quotations for the common stock during the periods indicated. The quotations
were obtained from information published by FINRA and reflect inter-dealer prices, without retail mark-up, mark-down or commission
and do not necessarily represent actual transactions.
|
|
High
|
|
|
Low
|
|
2018
|
|
|
|
|
|
|
|
|
Second
quarter (through April 10, 2018)
|
|
$
|
0.23
|
|
|
$
|
0.15
|
|
First
quarter
|
|
|
0.63
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$
|
0.58
|
|
|
$
|
0.27
|
|
Third
quarter
|
|
|
0.88
|
|
|
|
0.23
|
|
Second
quarter
|
|
|
0.64
|
|
|
|
0.30
|
|
First
quarter
|
|
|
0.81
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Fourth
quarter
|
|
$
|
1.02
|
|
|
$
|
0.32
|
|
Third
quarter
|
|
|
0.53
|
|
|
|
0.15
|
|
Second
quarter
|
|
|
0.56
|
|
|
|
0.26
|
|
First
quarter
|
|
|
0.73
|
|
|
|
0.38
|
|
The
last sale price of common stock on April 10, 2018 on the OTCQB market was $0.229 per share. As of April 10, 2018, there were 465
holders of record. We estimate that there are 5,130 beneficial shareholders. In many instances, a registered shareholder is a
broker or other entity holding shares in street name for one or more customers who beneficially own the shares.
Penny
Stock Regulation
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by
the SEC. Penny stocks generally are equity securities with a price of less than $5.00. Excluded from the penny stock designation
are securities listed on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information
with respect to transactions in such securities is provided by the exchange/system or sold to established customers or accredited
investors.
The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver
a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in connection with the transaction, and the monthly account statements showing the market
value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior
to a transaction in a penny stock, the broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for common stock,
and investors therefore may find it more difficult to sell their common stock.
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
The
following tables set forth selected consolidated financial data. We derived the consolidated statement of operations data for
the years ended December 31, 2016 and 2017 and the consolidated balance sheet data as of December 31, 2016 and 2017 from our consolidated
financial statements audited by Eide Bailly LLP and included at the end of this prospectus. Our historical results are not necessarily
indicative of the results to be expected for any future period. The following should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
related notes included at the end of this prospectus.
On
November 28, 2017, we were notified by Eide Bailly LLP of its decision to resign as our independent registered public accounting
firm. On December 1, 2017, the audit committee of our board of directors approved the engagement of M&K CPAS, PLLC, or M&K,
as our independent registered public accounting firm for the year ended December 31, 2017.
|
|
Years
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands, except share
and per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Leasing
─Greenhouse
|
|
$
|
620
|
|
|
$
|
204
|
|
Other
|
|
|
72
|
|
|
|
68
|
|
Total
revenue
|
|
|
692
|
|
|
|
272
|
|
Direct
cost of revenue
|
|
|
(33
|
)
|
|
|
─
|
|
Gross
profit
|
|
|
659
|
|
|
|
272
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,078
|
|
|
|
3,711
|
|
Asset
impairment
|
|
|
6,900
|
|
|
|
─
|
|
Depreciation
and amortization
|
|
|
420
|
|
|
|
166
|
|
Total
operating expenses
|
|
|
9,398
|
|
|
|
3,877
|
|
Loss
from operations
|
|
|
(8,739
|
)
|
|
|
(3,605
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,616
|
)
|
|
|
(1,780
|
)
|
Warrant
expense
|
|
|
(331
|
)
|
|
|
(327
|
)
|
Other
income
|
|
|
33
|
|
|
|
17
|
|
Total
other income (expense)
|
|
|
(2,914
|
)
|
|
|
(2,090
|
)
|
Net
loss from continuing operations before taxes
|
|
|
(11,653
|
)
|
|
|
(5,695
|
)
|
Net
loss from discontinued operations
|
|
|
(1,045
|
)
|
|
|
(2,624
|
)
|
Net
loss before non-controlling interest
|
|
|
(12,698
|
)
|
|
|
(8,319
|
)
|
Net
income attributable to non-controlling interest
|
|
|
637
|
|
|
|
200
|
|
Net
loss
|
|
|
(12,061
|
)
|
|
|
(8,119
|
)
|
Preferred
shareholder distributions
|
|
|
(863
|
)
|
|
|
(2,608
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(12,924
|
)
|
|
$
|
(10,727
|
)
|
Loss
per common share─basic and dilutive
|
|
$
|
(0.40
|
)
|
|
$
|
(0.38
|
)
|
Weighted
average shares outstanding─basic and dilutive
|
|
|
32,118
|
|
|
|
28,147
|
|
|
|
As
of December 30, 2017
|
|
Consolidated
Balance Sheet Data:
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
14
|
|
Working capital(1)
|
|
|
(24,707
|
)
|
Total
assets
|
|
|
38,152
|
|
Preferred
dividend payable
|
|
|
3,968
|
|
Total
indebtedness (including current portion of $17,419)
|
|
|
18,657
|
|
Total
liabilities
|
|
|
26,015
|
|
Total
stockholders’ equity
|
|
|
12,137
|
|
(1)
|
Working
capital is calculated as current assets less current liabilities.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The
following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the other
financial information included elsewhere in this report. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a
result of any number of factors, including those set forth under “Risk Factors” and elsewhere in this report.
Overview
In
the short-term, our business model is designed to provide us with increased profitability and cash flow that will enable us to
acquire and develop additional water rights and infrastructure. We seek to concentrate our acquisitions on water rights and infrastructure
that are, in part, owned by municipalities, which can alleviate and expedite the legal and political processes necessary for municipal
consumers to obtain excess water.
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:
|
●
|
HCIC:
From 2009 to 2010 we purchased 95% of the outstanding shares of Huerfano-Cucharas
Irrigation Company, or HCIC, in a series of transactions for $24.2 million in cash, promissory
notes and Two Rivers’ common stock. HCIC is a mutual ditch company formed in 1944,
and we have used its water rights and facilities to supply some of our farmland with
irrigation water. In the future, we will use these water rights to supply water to farmland
we lease to others and to implement our new water strategy.
|
|
●
|
Additional
Farmland:
From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s
ditch system for purchase prices totaling $1.4 million in cash and seller carry back
financing. In 2012 we acquired 1,584 acres in Butte Valley for $509,000 in cash and seller
carry back financing. In 2016, we returned 187 acres of Butte Valley land back to the
holder of seller carry back financing in exchange for forgiveness on $187,000 of debt
and associated accrued interest.
|
|
●
|
Orlando:
In 2011 we acquired Orlando Reservoir No. 2 Company, LLC, or Orlando, for $3.45 million
in cash, promissory notes and common stock. Our ownership of Orlando increases the reliability
of water supplies for our farmland in the Huerfano and Pueblo river basins. We undertook
a program to refurbish and restore Orlando’s diversion structure, storage reservoirs
and conveyance system. During the period from November 2011 to February 2012, we constructed
new outlet works, and in 2012 we reconstructed the diversion structure, which takes water
from the Huerfano River for storage in the Orlando reservoir and then conveyance to irrigate
our nearby leased farmland. Additional renovation projects will be completed as necessary
to provide reliable water supplies for farmland we lease to others and community use.
|
|
●
|
DFP
(discontinued operations):
In 2012 we acquired Dionisio Farms & Produce, Inc.,
or DFP, for $3.4 million in cash and promissory notes. DFP, which has operated for more
than 60 years, produces high-value fruits and vegetables as well as fodder crops. Through
this acquisition, we obtained 146 acres of irrigable farmland, 146 shares of the Bessemer
Ditch Irrigation Company, a senior water right holder on the main stem of the Arkansas
River and 2 supplemental ground water wells. As part of the acquisition, we entered into
leases for an additional 279 irrigable acres. In late 2016, based on three years of operational
losses, we decided to sell DFP assets and wind down our produce growing and distribution
business, and during the first quarter of 2017 we sold the DFP irrigated farmland and
the associated DFP produce business that no longer served our strategic vision of water
management
|
|
●
|
GrowCo:
We formed GrowCo, Inc., or GrowCo, in May 2014 for the purpose of constructing state-of-the-art
computer controlled greenhouses to be leased to licensed marijuana growers throughout
the United States. GrowCo is not a licensed marijuana grower or retailer. GrowCo does
not “touch the plant” and only provides growing infrastructure as a landlord
for licensed marijuana grower tenants along with support and administrative services.
In August 2014 we announced we were reserving 10 million of the GrowCo shares for distribution
to holders of common stock as of four record dates (January 1, 2015; April 1, 2015; July
1, 2015 and October 1, 2015) after a registration statement for GrowCo common shares
has been filed and declared effective, which has not yet occurred. Currently, GrowCo
has approximately 35 million common shares outstanding.
|
|
●
|
Water
Redev:
We formed Water Redevelopment Company, or Water Redev, in February 2017 to
separate our water assets from the rest of our business and to enable additional raising
of capital solely for the purpose of investing in our water assets. Water Redev is a
subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure
for water management and delivery, as further described in “─Our Water Operations”
below.
|
Revenue
Water
During
fiscal year 2017 we had negligible revenues from our water business as our new initiatives have not yet gained traction. We also
anticipate negligible water revenues in 2018 as we begin our reinvestment into our water assets. In 2019, we expect that revenue
will be generated from the leasing of water from our storage facilities, the selling of water taps, and the leasing of land and
water to agricultural users including marijuana and hemp growers.
Greenhouse
Leasing
GCP1
leased the first greenhouse and warehouse to related party Johnny Cannaseed pursuant to a lease agreement dated August 4, 2016,
which was subsequently terminated effective January 31, 2018. The lease agreement was classified as an operating lease because
it does not meet any of the four criteria which listed in ASC 840-10-25,“Lease Classification Criteria”. Before termination,
Johnny Cannaseed subleased the greenhouse and warehouse to two licensed marijuana growers.
Revenue
from the first half of the greenhouse (GCP1-1) began accruing on December 1, 2016. For the year ended December 31, 2017, total
lease revenue from GCP1-1 was $620,000. The second half of the greenhouse (GCP1-2) began accruing revenue on March 1, 2017. However,
due to non-payment, Johnny Cannaseed evicted the GCP1-2 tenant in December, 2017. Concurrently GCP1-2 remains unoccupied.
Effective
February 1, 2018, the Johnny Canaseed lease was mutually terminated. This lease was replaced by a lease to Amerijunna LLC, effective
February 1, 2018 and expiring August 31, 2020.
Related
Party Transactions
Pursuant
to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2017, management has evaluated related parties
and all transactions associated with those and determined that no transactions exist which would require disclosure, except as
disclosed below:
|
●
|
Wayne
Harding, Company Chief Executive Officer provided a short term loan to the Two Rivers
of $25,000. The loan is secured by land assets of the Two Rivers and carried an interest
rate of 12%. The loan was paid off in the third quarter of 2017.
|
|
●
|
Advances
totaling $34,400 resulting in a cumulative total of $72,999 for greenhouse expenses to
Johnny Cannaseed, LLC which is majority owned by former Company Chief Executive Officer
John McKowen.
|
|
●
|
Revenue
totaled $620,000 has been recorded for leasing income from Johnny Cannaseed.
|
|
●
|
Advances
totaled $26,957 resulting in a cumulative total of $43,798 for greenhouse expense to
McGrow, LLC which is partially owned by our former Company Chief Executive Officer John
McKowen.
|
|
●
|
Payments
totaling $335,531 to MCG Services, LLC which is majority owned by former Company Chief
Executive Officer John McKowen for costs associated with a services agreement with GrowCo.
|
|
●
|
Advances
to MCG Services, LLC totaled $13,295. This amount was written off.
|
|
●
|
Payments
totaling $11,210 to John McKowen for interest expense on a loan held by Mr. McKowen to
GrowCo.
|
|
●
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have
invested approximately $11.0M in GrowCo securities.
|
|
●
|
The
Chief Executive Officer of Two Rivers serves as the only members of the Sunset Metropolitan
District (Sunset). Sunset is a quasi-governmental agency operating under Title 32 of
the State of Colorado Constitution. As of December 31, 2017, Two Rivers had advanced
$81,000 to Sunset.
|
|
●
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved
with the Suncanna lawsuit along with each party’s legal counsel. To date, no settlement
has been proposed.
|
|
●
|
Two
Rivers leases its former corporate headquarters office space to McGrow. Total lease payments
are $47,000 per year.
|
|
●
|
Wayne
Harding, Company Chief Executive Officer provided a long-term loan to Two Rivers of $50,000.
The loan is secured by land assets of Two Rivers and carries an interest rate of 18%.
|
|
●
|
Wayne
Harding provided a short-term loan to Two Rivers of $32,500 in the quarter ended December
31, 2017. $17,500 was repaid before the year ended December 31, 2017. The remainder,
$15,000 plus interest was paid in February 2018.
|
Results
of Operations
Year
ended December 31, 2017 compared to year ended December 31, 2016
For
the years ended December 31, 2017 and 2016 our revenues have been predominantly derived from our greenhouse leasing activities.
Near the end of 2016 we decided to discontinue our farming operations. Consequently we have classified our farming financial results
on our income and balance sheet statements as Discontinued Operations.
During
the year ended December 31, 2017, we recognized $620,000 of greenhouse lease income. Due to past problems with our greenhouse
tenants and agreements reached with Johnny Cannaseed and its sub-tenant and payment of rent in early 2018, management decided
to only recognize actual lease payments received. We also recognized $72,000 of other income which was from both water and land
leasing activities. After the direct cost of our leasing activities, we reported a gross margin of $659,000 for the year ended
December 31, 2017 compared to $272,000 for the year ended December 31, 2016.
Our
first greenhouse began to generate revenue on September 1, 2015 and was partially occupied by Suncanna (our former related party
tenant, as described under “Overview”). Suncanna had agreed to pay the full lease payments effective September 1,
2016. At December 31, 2015, we had recorded lease receivables of $904,000 and deferred rent of $43,400 in connection with the
Suncanna lease arrangements. On April 14, 2016 we were notified that Suncanna LLC had received a notice of suspension from the
Marijuana Enforcement Division of the Colorado Department of Revenue.
Due
to the suspension order and Suncanna’s non-payment, Suncanna was in violation of its lease agreement with us. On April 25,
2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Consequently, during the quarter
ended March 31, 2016, we stopped recognizing lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent
that had been recorded as of December 31, 2015. We also wrote off advances to Suncanna totaling $587,000.
During
the year ended December 31, 2017, expenses from operations were $9,398,000 compared to $3,877,000 for the year ended December
31, 2016. The increase of $5,521,000 was primarily due to recognition of an impairment of our water infrastructure of $6,900,000
offset by lower general and administrative and a lower expense from the write-off of tenant receivables.
During
the year ended December 31, 2017, other expenses were $2,914,000 compared to $2,090,000 for the year ended December 31, 2015.
The increase in other expenses of $824,000 was the result of an increase in GrowCo interest expense of $879,000 partially offset
by a reduction of warrant expense.
These
figures produced a net loss from continuing operations of $11,653,000 for the year ended December 31, 2017 compared to a net loss
of $5,695,000 for the year ended December 31, 2016.
Loss
due to discontinued operations was $2,624,000 for the year ended December 31, 2016. There was a loss from discontinue operations
for the year ended December 31, 2017 of $1,045,000.
Net
loss attributable to noncontrolling interests was $637,000 for the year ended December 31, 2017 compared to a loss of $200,000
for the year ended December 31, 2016.
Preferred
distributions for the year ended December 31, 2017 was $863,000 compared to $2,608,000 for the year ended December 31, 2016. The
reduction of $1,745,000 was mostly attributed to the recapture of recorded preferred distributions to GCP1 preferred members due
to write off of lease revenue.
The
above produced a loss to Two Rivers common shareholders of $12,924,000 for the year ended December 31, 2017 compared to $10,727,000
loss for the year ended December 31, 2016.
Liquidity
and Capital Resources
Resources
We
have expanded our operations relying on various funding mechanisms, including debt, convertible debt and equity capital. Since
inception, we have raised and invested over $82 million to acquire, improve, integrate farm/water assets and launch and expand
our GrowCo greenhouse facilities and support operations.
With
the discontinuance of our farming operations we no longer require the large capital outlay for crop inputs. We believe our existing
cash, cash equivalents, our projected cash flows from greenhouse leasing operating activities and anticipated influx of capital
from financing activities will be sufficient to meet our anticipated cash needs for at least the next twelve months. On February
9, 2018 Two Rivers closed a PIPE (private investment in public entity) that provided net funding of $515,000. The proceeds were
used to help reduce our accounts payable and provide working capital. It is important for Two Rivers to acquire additional funding.
At this time, we have no further definitive agreements to provide the necessary funding.
Our
future working capital requirements will depend on many factors, including the expansion of water projects and expansion of our
greenhouse development. To the extent our cash, cash equivalents and cash flows from operating activities are insufficient to
fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We also
may need to raise additional funds in the event we determine in the future to affect one or more acquisitions of businesses, technologies
and products. If additional funding is required, we may not be able to affect an equity or debt financing on terms acceptable
to us or at all.
We
historically have funded our operations primarily from the following sources:
|
●
|
equity
and debt proceeds through private placements of Parent Company and subsidiaries securities;
|
|
●
|
revenue
generated from operations; and
|
|
●
|
loans
and lines of credit.
|
At
the present time we have no available line or letters of credit.
Cash
flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital.
As of December 31, 2017, we had cash and cash equivalents of $14,000. Cash flow consumed by our operating activities totaled $2,898,000
for the year ended December 31, 2017 compared to operating activities consuming $2,729,000 for the year ended December 31, 2016.
As
of December 31, 2017, we had $70,000 in current assets and $24,777,000 in current liabilities. A large portion of the current
liabilities ($6,301,000) is from the HCIC seller carry back notes, some of which were due June 30, 2016. As of December 31, 2017,
we are in default on the HCIC note payments. As a result, the entire amount of the notes has been classified as current. Another
large portion of the current liabilities is $10,607,000 in GrowCo notes payable. These notes are also in default due to not being
current on the interest due on these notes. While there is no assurance, management believes it will be successful in restructuring
these notes and bring them current.
Cash
provided in investing activities for the year ended December 31, 2017 was $1,215,000, due to a net of $1,721,000 from the sale
of property and equipment offset by $506,000 in construction in progress. Cash used in investing activities for the year ended
December 31, 2016 was $3,480,000. This was comprised of $2,597,000 for construction in progress, $691,000 for investment in water
assets and $192,000 for purchase of equipment.
Cash
produced in financing activities was $1,547,000 for the year ended December 31, 2017 compared to a production of cash of $5,838,000
for the year ended December 31, 2016. The decrease of $4,291,000 was due to proceeds from the sale of GCP Super Units LLC preferred
member in 2016 of $1,095,000 that was reduced to $345,000 in 2017. Further in 2016 GrowCo issued $5,237,000 in notes which was
reduced to $2,456,000 in 2017. For the year ended December 31, 2017, there was a reduction of notes payable of $1,560,000 compared
to $950,000 for the year ended December 31, 2016.
Requirements
In
January 2015 we renewed a lease with the Colorado Center in Denver, Colorado, for our corporate headquarters. The space is 1,775
square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The lease terminates on
August 31, 2018. On March 1, 2017 Two Rivers entered into a sub-lease agreement with related party McGrow for these office facilities.
The sub-lease began April 1, 2017. The amounts due at the base rate are as follows:
Period
|
|
Amount
Due
|
|
2018
|
|
$
|
33,000
|
|
In
February 2017 we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This
space is 1,554 square feet and monthly payments of $2,201. The lease terminates on March 31, 2020. Two Rivers’ previous
corporate headquarters has been sub-leased to a related party McGrow, LLC, a related party, for the remainder of that lease term.
The amounts due at the base rate for our new offices are as follows:
Period
|
|
Amount
Due
|
|
2018
|
|
$
|
28,000
|
|
2019
|
|
$
|
28,000
|
|
2020
|
|
$
|
6,000
|
|
Below
is a table showing our anticipated principal payments due by periods.
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
4+
years
|
|
|
Total
|
|
Long
Term Debt Obligations
|
|
$
|
17,856,000
|
|
|
$
|
753,000
|
|
|
$
|
498,000
|
|
|
$
|
19,107,000
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating
Lease Obligations
|
|
$
|
25,200
|
|
|
$
|
39,600
|
|
|
$
|
-
|
|
|
$
|
64,800
|
|
Purchase
and Development Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
Long-term Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
17,881,200
|
|
|
$
|
792,600
|
|
|
$
|
498,000
|
|
|
$
|
19,171,800
|
|
Critical
Accounting Policies
We
have identified the policies below as critical to our business operations and the understanding of our results from operations.
The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s
Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes
to the Consolidated Financial Statements beginning on page F-12 of this document. Note that our preparation of this document requires
us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting
period. There can be no assurance that actual results will not differ from those estimates.
Revenue
Recognition
Lease
Revenues – Related Party
During
the year ending December 31, 2017, GrowCo Partners 1, LLC, leased its only currently operating greenhouse and warehouse to a related
party Johnny Cannaseed pursuant to a lease agreement dated August 4, 2016, which was subsequently terminated effective January
31, 2018. The lease agreement was classified as an operating lease because it does not meet any of the four criteria which listed
in ASC 840-10-25,“Lease Classification Criteria”. Before termination, Johnny Cannaseed subleased the greenhouse and
warehouse to two licensed marijuana growers.
Revenue
from the first half of the greenhouse (GCP1-1) began accruing on December 1, 2016. For the year ended December 31, 2017, total
lease revenue from GCP1-1 was $620,000. The second half of the greenhouse (GCP1-2) began accruing revenue on March 1, 2017. However,
due to non-payment, Johnny Cannaseed evicted the GCP1-2 tenant in December, 2017. Concurrently GCP1-2 remains unoccupied.
Effective
February 1, 2018, the Johnny Cannaseed lease was mutually terminated. This lease was replaced by a lease to Amerijuna LLC, effective
February 1, 2018 and expiring August 31, 2020.
Member
Assessments
Once
per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment
per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half
of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by the Two Rivers to HCIC are
eliminated in consolidation of the financial statements.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
Debt
and Equity
Two
Rivers accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt,
and allocates proceeds received to the warrants based on relative fair values.
Two
Rivers also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”),
which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or
in the money at inception because the conversion option has an effective strike price that is less than the market price of the
underlying stock at the commitment date. Two Rivers would recognize the BCF by allocating the intrinsic value of the conversion
option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion
price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in
a discount on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
Stock
Based Compensation
We
account for share-based payments in accordance with FASB Accounting Standards Codification (“ASC”) 710-10-55. We use
the Black-Scholes option valuation model to estimate the fair value of stock options and warrants issued under ASC 710-10-55.
For the years ended December 31, 2017 and 2016, equity compensation in the form of stock options, warrants and grants of restricted
stock that vested totaled $534,000 (including both Two Rivers and Water Redevelopment Company) and $477,000, respectively.
Impairments
Once
per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable
water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value
is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment
will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not
be reversed in future periods.
Prior
to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For
the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis
caused the recognition of $6,900,000 impairment to the water infrastructure.
Recently
Issued Accounting Pronouncements
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
“
Income Statement – Reporting Comprehensive Income (Topic 220)
”. This ASU deals with the reclassification
of certain tax effects from Accumulated Other Comprehensive Income. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
July 2017, FASB issued ASU “
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815)
”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to
the Company and the impact will be immaterial.
In
November 2016, the FASB issued ASU 2016-18, “
Statement of Cash Flows
”. The new guidance will require that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after
December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. We plan to adopt this new
guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial
statements.
In
March 2016, the FASB issued ASU 2016-09, “
Improvements to Employee Share-Based Compensation Accounting
”, which
requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital, and treated as
an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election
to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur.
ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified
as a financing activity on the statement of cash flows. The ASU 2016-09 was subsequently updated with ASU 2017-09, issued in May
2017. These standards will become effective for us in fiscal 2018. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as
a Going Concern, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40 Presentation of Financial Statements – Going Concern”,
by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial
statements, including requiring management to perform interim and annual assessments of an entity’s ability to continue
as a going concern within one year of the date of issuance of the entity’s financial statements and providing certain disclosures
if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 will be effective after
December 15, 2016, and early adoption is permitted.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
Off
Balance Sheet Arrangements
We
have no significant off balance sheet transactions, arrangements or obligations.
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 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:
|
●
|
HCIC:
From 2009 to 2010 we purchased 95% of the outstanding shares of Huerfano-Cucharas
Irrigation Company, or HCIC, in a series of transactions for $24.2 million in cash, promissory
notes and Two Rivers’ common stock. HCIC is a mutual ditch company formed in 1944,
and we have used its water rights and facilities to supply some of our farmland with
irrigation water. In the future, we will use these water rights to supply water to farmland
we lease to others and to implement our new water strategy.
|
|
●
|
Additional
Farmland:
From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s
ditch system for purchase prices totaling $1.4 million in cash and seller carry back
financing. In 2012 we acquired 1,584 acres in Butte Valley for $509,000 in cash and seller
carry back financing. In 2016, we returned 187 acres of Butte Valley land back to the
holder of seller carry back financing in exchange for forgiveness on $187,000 of debt
and associated accrued interest.
|
|
●
|
Orlando:
In 2011 we acquired Orlando Reservoir No. 2 Company, LLC, or Orlando, for $3.45 million
in cash, promissory notes and common stock. Our ownership of Orlando increases the reliability
of water supplies for our farmland in the Huerfano and Pueblo river basins. We undertook
a program to refurbish and restore Orlando’s diversion structure, storage reservoirs
and conveyance system. During the period from November 2011 to February 2012, we constructed
new outlet works, and in 2012 we reconstructed the diversion structure, which takes water
from the Huerfano River for storage in the Orlando reservoir and then conveyance to irrigate
our nearby leased farmland. Additional renovation projects will be completed as necessary
to provide reliable water supplies for farmland we lease to others and community use.
|
|
●
|
DFP
(discontinued operations):
In 2012 we acquired Dionisio Farms & Produce, Inc.,
or DFP, for $3.4 million in cash and promissory notes. DFP, which has operated for more
than 60 years, produces high-value fruits and vegetables as well as fodder crops. Through
this acquisition, we obtained 146 acres of irrigable farmland, 146 shares of the Bessemer
Ditch Irrigation Company, a senior water right holder on the main stem of the Arkansas
River and 2 supplemental ground water wells. As part of the acquisition, we entered into
leases for an additional 279 irrigable acres. In late 2016, based on three years of operational
losses, we decided to sell DFP assets and wind down our produce growing and distribution
business, and during the first quarter of 2017 we sold the DFP irrigated farmland and
the associated DFP produce business that no longer served our strategic vision of water
management
|
|
●
|
GrowCo:
We formed GrowCo, Inc., or GrowCo, in May 2014 for the purpose of constructing state-of-the-art
computer controlled greenhouses to be leased to licensed marijuana growers throughout
the United States. GrowCo is not a licensed marijuana grower or retailer. GrowCo does
not “touch the plant” and only provides growing infrastructure as a landlord
for licensed marijuana grower tenants along with support and administrative services.
In August 2014 we announced we were reserving 10 million of the GrowCo shares for distribution
to holders of common stock as of four record dates (January 1, 2015; April 1, 2015; July
1, 2015 and October 1, 2015) after a registration statement for GrowCo common shares
has been filed and declared effective, which has not yet occurred. Currently, GrowCo
has approximately 35 million common shares outstanding.
|
|
●
|
Water
Redev
: We formed Water Redevelopment Company, or Water Redev, in February 2017 to
separate our water assets from the rest of our business and to enable additional raising
of capital solely for the purpose of investing in our water assets. Water Redev is a
subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure
for water management and delivery, as further described in “─Our Water Operations”
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:
|
●
|
We
will seek to address the need for municipal water storage.
|
|
●
|
We
believe there are a variety of opportunities to lease, both short term and long term,
our water assets.
|
|
●
|
We
have identified underutilized land that, along with the water we own, can be leased for
agriculture activities.
|
|
●
|
We
plan to execute on a water supply agreement we entered into in January 2011, with a real
estate development company in Huerfano County by beginning to supply raw water for water
taps.
|
Our
principal water rights include the following:
|
●
|
As
noted in “—Overview” above, we acquired control of HCIC in order to
use its water rights and facilities to supply some of our farmland with irrigation water.
The HCIC farmland became fallow in the mid-twentieth century when coal mines in Huerfano
County, Colorado, were shut down. The coal mines had continuously pumped water from the
Vermejo/Trinidad Formation, which contained a renewable underground aquifer that is fed
by Sangre de Cristo Mountains snowmelt. The U.S. Geological Service estimates that the
Raton Vermejo Basin, where we have water rights, contains an estimated 12 trillion gallons
or 36 million acre-feet of relatively untapped, clean and renewable water (Adam Bedard,
2010). HCIC owns the Cucharas and Huerfano Valley Reservoirs and two ditch systems located
in Pueblo County, Colorado. The HCIC ditch systems have the right to distribute water
over approximately 30,000 acres in Pueblo County, Colorado.
|
|
●
|
The
Orlando water rights include the senior-most direct flow water right on the Huerfano
River, or #1 priority, along with the #9 priority and miscellaneous junior water rights.
The seniority of those water rights allowed the production of crops during most of the
recent drought years. The Orlando assets also include the Orlando reservoir, which is
situated on the Huerfano branch of the Huerfano River and has a storage capacity of 3,100
acre-feet.
|
An
acre-foot, or A.F., of water is the amount of water required to cover one acre of land 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 re-time 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
owned the following surface water rights as of March 31, 2018:
Structure
|
|
Elevation
|
|
|
Priority
No.
|
|
|
Appropriation
Date
|
|
Consumptive
Use (A.F.)
|
|
|
Decreed
Amount (cfs)
|
|
Butte
Valley Ditch
|
|
|
5,909
ft
|
|
|
|
1
|
|
|
05/15/1862
|
|
|
360
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
9
|
|
|
05/15/1865
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
86
|
|
|
05/15/1886
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
111
|
|
|
05/15/1886
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Rice Ditch
|
|
|
5,725
ft
|
|
|
|
19
|
|
|
03/01/1867
|
|
|
131
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huerfano
Valley Ditch
|
|
|
4,894
ft
|
|
|
|
120
|
|
|
02/02/1888
|
|
|
2,891
|
|
|
|
42.0
|
|
|
|
|
|
|
|
|
342
|
|
|
05/01/1905
|
|
|
|
|
|
|
18.0
|
|
“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.
Storage
Rights and Infrastructure
The
following table presents our holdings of storage water rights as of March 31, 2018:
Structure
|
|
Elevation
|
|
|
Priority
No.
|
|
|
Appropriation
Date
|
|
Average
Annual
Yield (A.F.)
|
|
|
Decreed
Amount (A.F.)
|
|
|
Operable
Storage (A.F.)
|
|
Huerfano
Valley Reservoir
|
|
|
4,702
ft
|
|
|
|
6
|
|
|
02/02/1888
|
|
|
1,424
|
|
|
|
2,017
|
|
|
|
1,000
|
|
Cucharas
Valley Reservoir
|
|
|
5,570
ft
|
|
|
|
66
|
|
|
03/14/1906
|
|
|
3,055
|
|
|
|
31,956
|
|
|
|
*
|
|
Cucharas
Valley Reservoir**
|
|
|
5,705
ft
|
|
|
|
66
|
c
|
|
03/14/1906
|
|
|
|
|
|
|
34,404
|
|
|
|
|
|
Orlando
Reservoir #2
|
|
|
5,911
ft
|
|
|
|
349
|
|
|
12/14/1905
|
|
|
1,800
|
|
|
|
3,110
|
|
|
|
2,400
|
|
*
|
See
description below regarding pending litigation.
|
|
|
**
|
This
is a conditional right while the engineering and construction of structures are completed to perfect a water right, in this
case to physically store the water. The conditional right establishes a seniority date but allows time for completion of the
project. Conditional rights are reviewed every six years by the water court to confirm that progress is being made on the
effort to perfect the right. When a conditional water right is perfected, which can be done incrementally in the case of storage,
the water right becomes absolute. In addition, the Cucharas Valley Reservoir has Conditional rights to 34,404 A.F. of additional
storage.
|
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 was not 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 for the contempt proceedings
has been set for 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 system 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.
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
Partners, LLC, or TR Capital, and GrowCo own all of the outstanding common shares of GCP1, and GCP Super Units LLC 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:
|
●
|
On
April 14, 2016 we were notified that Suncanna had received a notice of suspension from
the Marijuana Enforcement Division of the Colorado Department of Revenue. This suspension
remains in place until a hearing.
|
|
●
|
This
suspension, in addition to non-payment of back due lease payments owed, caused Suncanna
to be in violation of its lease with GCP1. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna,. Due to the eviction process, during
the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues –
Related Party and $587,000 in advances to Suncanna and we did not recognize any Lease
Revenues – Related Party. During the nine months ended September 30, 2016, we recognized
$25,000 in greenhouse lease revenue from a payment received from Suncanna in early April
2016. The total write off of $1.330 million was partially offset by a $350,000 reduction
in the amount owed to the GCP1 preferred unit holders. On July 22, 2016 GCP1 received
a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna
to vacate the greenhouse by September 6, 2016.
|
|
●
|
On
August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo
County Colorado District Court against GrowCo, GrowCo Business Development, LLC, GCP1,
GrowCo Funding, LLC, TR Capital, Two Rivers and certain current and former employees,
and associates. We believe that the suit has no merit and will have no material impact
on our financial condition.
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse
and GCP1 took possession and began re-conditioning its greenhouse for a new tenant, which
began growing operations in December, 2016.
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court
judge ruled in favor of plaintiff Aaron Van Wingerden and against GCP1 in a matter regarding
the prevention of Suncanna’s access to GCP1’s greenhouse prior to Suncanna
vacating the premises on September 6, 2016. We believe that this ruling was in error
and are appealing this decision.
|
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
– 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, which issued all of its common units to 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 we 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 us 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 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 31, 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 located at 3025 S. Parker Road, 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, we 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 compete with 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 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 March 31, 2018, 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 Columbia 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.
MANAGEMENT
Executive
Officers, Key Employees and Directors
Our
executive officers, key employees and directors, and their ages and positions as of April 10, 2018, are set forth below:
Name
|
|
Age
|
|
Position
|
Wayne
E. Harding III
|
|
63
|
|
Chief
Executive Officer, Interim Chief Financial Officer and Chairman of the Board
|
Samuel
Morris(1)(2)(3)
|
|
74
|
|
Director
|
Michael
Harnish(1)(2)
|
|
67
|
|
Director
|
James
Cochran(2)
|
|
57
|
|
Director
|
T.
Keith Wiggins(3)
|
|
77
|
|
Director
|
Christopher
Bragg(1)
|
|
34
|
|
Director
|
(1)
|
Member
of Audit Committee.
|
(2)
|
Member
of Compensation Committee.
|
(3)
|
Member
of Governance and Nominating Committee.
|
Executive
Officers
Our
officers are elected by the board of directors at the first meeting after each annual meeting of our shareholders and they hold
office until their successors are duly elected and qualified under our bylaws.
The
directors named above will serve until the next annual meeting of our shareholders. Officers hold their positions at the pleasure
of the board of directors subject to the terms of employment agreements described below in “Item 11. Executive Compensation”
under the heading “Executive Compensation—Employment and Change in Control Agreements.” There is no arrangement
or understanding between our directors and officers and any other person pursuant to which any director or officer was or is to
be selected as a director or officer.
There
are no family relationships among any of the directors or executive officers. Neither of the executive officers is related by
blood, marriage or adoption to any of our other directors or executive officers.
Biographical
Information
Wayne
E. Harding III
has served as our Chief Executive Officer since June 2016 and as our interim Chief Financial Officer since
January 17, 2018. Mr. Harding previously served as our Chief Financial Officer from 2009 to March 2017 and as our controller from
2008 to 2009. He served as vice president business development of Rivet Software from 2004 to 2007. From 2002 to 2004 Mr. Harding
was the owner and President of Wayne Harding & Company PC, and from 2000 until 2002 he was director-business development of
CPA2Biz. Mr. Harding serves on the board of directors and head of the Audit Committee of AeroGrow International (OTCQB: AERO),
a public company that manufactures and markets soil-free indoor garden products. Mr. Harding holds an active CPA license in Colorado
and holds the CGMA (Charter Global Management Accountant) designation. Mr. Harding is past-President of the Colorado Society of
CPAs. He received his BS and MBA degrees from the University of Denver.
Samuel
Morris
has served as one of our directors since July 2016. Mr. Morris is the principal of Morris Law Associates which he formed
in 2006 after serving as general counsel to several companies. Through Morris Law, he has provided counsel on a variety of legal
matters, such as acquisitions, management buyouts, restructurings and personnel matters. From 2006 until 2010, he also was General
Counsel for Gichner Shelter Systems, Inc. Prior to Morris Law Associates, Mr. Morris was General Counsel of Wire One Communications,
Inc. (formerly V-SPAN), a full-service video conferencing company, as well as to a number of smaller companies, handling customer
and vendor contracts, employment matters, acquisitions and litigation from 2002 to 2005. In 2000-2001, he was Senior Vice President,
General Counsel and Secretary of Digital Access, LLC, a telecommunications broadband start-up. From 1993 to 2000, Mr. Morris was
Vice President/General Counsel/Secretary for Lenfest Communications, Inc., a public diversified cable television and entertainment
company. From 1985 to 1993, Mr. Morris was a Senior Partner of Hoyle, Morris & Kerr, a law firm that he co-founded. Prior
to that Mr. Morris was in private practice, primarily as a partner in the law firm of Dilworth, Paxson, Kalish and Kaufman. Mr.
Morris received his B.A. degree, cum laude, from Harvard College and his J.D. degree from the National Law Center of the George
Washington University in Washington, D.C.
Michael
Harnish
has served as one of our directors since July 2016. Officially retired, Mr. Harnish continues to serve as technology
consultant to the Examination Review Board responsible for the administration and content of the CPA exam since 1999. He is also
currently serving on the Board of Directors of Alliance Sports Group where he is chairman of the compensation committee as well
as a member of the audit and special committees. Mr. Harnish previously served on the Board of Directors of DeltaHawk Engines
where he was chairman of the audit committee. Prior to retirement, Mr. Harnish held the offices of COO/CIO of EthicsPoint, Inc.,Fios,
Inc., CPA2BIZ, and the law firm of Dickinson Wright PLLC. He has also served as President and CEO of Technology Consulting Partners
LLC and was a former Associate, Technology Consulting Solutions at Plante& Moran. Mr. Harnish is a former Partner of Crowe,
Chizek and Company CPAs (now Crowe Horwath LLP). Additionally, Mr. Harnish previously held the office of Director of Consulting
Services, Lotus Development Corp. and has been a member of Various AICPA Committees including the Computerization Implementation
Committee (CIC) and the first Chairman of the Information Technology Executive Committee and Membership Division. Mr. Harnish
is a former member of the Illinois CPA Society Board of Directors and recipient of the AICPA Innovative User of Technology and
the AICPA Sustained Contribution Awards. Mr. Harnish received his B.S. in Industrial Management with a Computer Science Technical
Option from Purdue University and has received the certifications of: Certified Public Accountant (CPA); Certified Information
Technology Professional (CITP); Certified in Financial Forensics (CFF); Certified Information Systems Auditor (CISA); EnCase Certified
Examiner (EnCE); and the Certificate in Data Processing (CDP).
James
D. Cochran
has served on our board since September 2016. Mr. Cochran is founder and Managing Principal of Aspen Capital Partners,
LLC, a privately held real estate investment, development, and asset management organization that focuses on all major real estate
asset classes across the investment risk spectrum. Mr. Cochran has over 32 years of leadership, investments, operations, and capital
markets experience with real estate firms in both the public and private sectors. He has had hands on operations, leasing, acquisitions,
and development roles with local, national, and international responsibilities and has also been instrumental in successfully
completing two IPO’s and raising private equity from national and foreign investors. He has served as President and Chief
Investment Officer for DCT Industrial Trust (NYSE: DCT), Board Member and member of the Executive Committee of Macquarie ProLogis
Trust, an Australian Listed Property Trust (ASX:MPR), and Senior Vice President and member of the Investment Committee for ProLogis
Trust (NYSE:PLD). Before joining ProLogis, Mr. Cochran worked at TCW Realty Advisors and Economics Research Associates. He is
the former Chairman of the Board of the Denver Street School, a non-profit high school in Denver. Mr. Cochran has a B.A. degree
from the University of California, Davis and an MBA from the Anderson School at UCLA. Mr. Cochran is 55 years old.
T.
Keith Wiggins
has served on our board since September 2016. Mr. Wiggins is one of the early investors in Two Rivers. He resides
in southern Colorado and operates a large cattle ranch. In 1995, Mr. Wiggins retired from Union Texas Petroleum Holdings, a Fortune
500 company, as vice president of human resources and environmental services. Prior to his tenure at Union Texas, Mr. Wiggins
was employed by Allied Chemical Corporation and held positions with increasing management responsibility in manufacturing, engineering,
human resources and labor relations. Mr. Wiggins has board experience with Lake Forrest Utility district and various community
entities. On February 2, 2006, Colorado governor, Bill Owens, appointed Mr. Wiggins to the 3rd Judicial Nominating Commission
of the State of Colorado Supreme Court. Mr. Wiggins received his B.S. degree from Auburn University and his Master of Agriculture
from Colorado State University, Fort Collins. He is a veteran of the U.S. Army and the National Guard.
Christopher
Bragg
has served on our board since September 2016. He has nearly fifteen years of experience in the financial industry. After
spending the first two years of his career in the private banking business, Mr. Bragg joined Western Asset Management as a Portfolio
Controller. He quickly transitioned over to the mutual fund operations group, where he supported the rollout and growth of the
newly formed Legg Mason and Western Asset managed mutual funds; the company had over $400 billion in assets under management at
the time. In 2007, Mr. Bragg transitioned over to the public equities side of the business and joined Camden Asset Management
as a Controller and Trade Support Specialist. He worked directly with the trading desk in the development and support of their
Convertible Arbitrage strategic side of the business. During his 5+ years with the company, Mr. Bragg played a crucial role in
a restructure of the operational/back office division, the buildout of a proprietary in-house trading system, and assisted in
the maintenance of the ever-changing compliance requirements for the $2 billion under management. He then spent just over a year
with Empire Capital Management; a technology focused hedge fund with $800 million under management across several funds. In his
time as a trading specialist and west coast operations manager, he assisted in the growth of the newly built west coast office
and implemented a multi-faceted trading platform that allowed traders on both coasts to input, execute and allocate orders across
the several fund accounts. In mid-2014, Mr. Bragg left Empire Capital Management to join the McGrain Financial group as a partner
in the overseeing of over $70 million in assets under management. He assists in the management of the day to day activities of
the investment portfolio, and is active in the local Pasadena community as well.
Corporate
Governance
Code
of Conduct
We
have adopted a written code of ethics that applies to directors, officers and employees, including the principal executive officer,
principal financial officer, principal accounting officer or controller, and persons performing similar functions. You can access
our code of conduct for our board in the “Investor” section of our website located at
www.2riverswater.com/investors
.
Employees’ (including officers and management) code of conduct is detailed in our employee handbook, which all employees
must sign. We post on our website all disclosures required by law concerning any amendments to, or waivers from, any provision
of the code. Our website and its contents are not incorporated into this report.
Board
Leadership Structure
The
chair of the board of directors is responsible for approving the agenda for each board meeting and for determining, in consultation
with the other directors, the frequency and length of board meetings. The board of directors does not have a policy on whether
or not the roles of chief executive officer and board chair should be separate and, if they are to be separate, whether the board
chair should be selected from the non-employee directors or be an employee. The board believes that it is preferable to evaluate
the appropriateness of separating these roles from time to time in light of the best interests of our company and our shareholders.
Wayne Harding, our chief executive officer, currently serves as the board chair.
Director
Nomination Process
The
process followed by the compensation, governance and nominating committee to identify and evaluate director candidates includes
requests to directors and others for recommendations, meetings from time to time to evaluate biographical information and background
material relating to potential candidates, and interviews of selected candidates by members of the compensation, governance and
nominating committee and the board of directors.
In
considering whether to recommend any particular candidate for inclusion in the board’s slate of recommended director nominees,
the compensation, governance and nominating committee applies the criteria set forth in our corporate governance guidelines. These
criteria include the candidate’s integrity, business acumen, knowledge of our business and industry, experience, diligence,
conflicts of interest and the ability to act in the interests of all shareholders. The board’s corporate governance guidelines
specify that the value of diversity on the board should be considered by the compensation, governance and nominating committee
in the director identification and nomination process. The compensation, governance and nominating committee seeks nominees with
a broad diversity of experience, professions, skills, geographic representation and backgrounds. The compensation, governance
and nominating committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite
for each prospective nominee. The board believes that the backgrounds and qualifications of its directors, considered as a group,
should provide a composite mix of experience, knowledge and abilities that will allow it to fulfill its responsibilities. Nominees
are not discriminated against on the basis of race, religion, national origin, sexual orientation, disability or any other basis
proscribed by law.
Shareholders
may recommend individuals to the compensation, governance and nominating committee for consideration as potential director candidates
by submitting their names, together with appropriate biographical information and background materials and a statement as to whether
the shareholder or group of shareholders making the recommendation has beneficially owned more than five percent of the common
stock for at least a year as of the date such recommendation is made, to the compensation, governance and nominating committee
in care of Two Rivers Water & Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014, Attention: Secretary.
Assuming that appropriate biographical and background material has been provided on a timely basis, the compensation, governance
and nominating committee will evaluate shareholder-recommended candidates by following substantially the same process, and applying
substantially the same criteria, as it follows for candidates submitted by others.
Communicating
with Independent Directors
The
board of directors will give appropriate attention to written communications that are submitted by shareholders, and will respond
if and as appropriate. The director serving as chair of the compensation, governance and nominating committee, with the assistance
of our chief financial officer, is primarily responsible for monitoring communications from shareholders and for providing copies
or summaries to the other directors as such director considers appropriate.
Under
procedures approved by a majority of our independent directors, communications are forwarded to all directors if they relate to
important substantive matters and include suggestions or comments that the chief financial officer considers to be important for
the directors to know. In general, communications relating to corporate governance and corporate strategy are more likely to be
forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we receive repetitive
or duplicative communications.
Shareholders
who wish to send communications on any topic to the board should address such communications to the board in care of Two Rivers
Water & Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014, Attention: Secretary.
Compensation
Committee Interlocks and Insider Participation
The
members of the compensation committee are Samuel Morris, James Cochran and Michael Harnish. Neither Mr. Morris, Mr. Cochran nor
Mr. Harnish has ever been an officer or employee of our company or any subsidiary of ours or had any relationship with us during
2017 requiring disclosure under Item 404 of Regulation S-K of the SEC.
Our
executive officer has not served as a director or member of the compensation committee (or other committee serving an equivalent
function) of any other entity, one of whose executive officers served as a member of our board of directors or our compensation
committee.
Director
Attendance at Board and Shareholder Meetings
The
board of directors met formally multiple times during 2017, either in person or by teleconference. The board conducted numerous
special board meetings during 2017. Each director attended at least 90% of the meetings of the board held in 2017 during the period
in which such person was a director.
We
do not have a policy regarding director attendance at our annual meetings of shareholders. Messrs. Morris, Harnish, Cochran, Wiggins
and Bragg all attended our annual meetings of shareholders held on September 30, 2016 and September 7, 2017.
Board
Committees
The
board of directors has established an audit committee, a compensation, and a governance and nominating committee.
Audit
Committee
Members
of the audit committee are Michael Harnish, Chris Bragg, and Samuel Morris. Mr. Harnish chairs the audit committee.
The
committee’s responsibilities include:
|
●
|
appointing,
approving the compensation of, and assessing the independence of our registered public accounting firm;
|
|
|
|
|
●
|
overseeing
the work of the registered public accounting firm, including through the receipt and consideration of certain reports from
such firm;
|
|
●
|
reviewing
and discussing our annual and quarterly financial statements and related disclosures with management and the registered public
accounting firm;
|
|
|
|
|
●
|
monitoring
our internal control over financial reporting, disclosure controls and procedures, and code of ethics, and overseeing risk
management;
|
|
|
|
|
●
|
establishing
policies regarding hiring employees from the registered public accounting firm and procedures for the receipt and retention
of accounting related complaints and concerns;
|
|
|
|
|
●
|
meeting
independently with our registered public accounting firm and management; and
|
|
|
|
|
●
|
reviewing
and approving or ratifying any related-person transactions.
|
The
audit committee met four times during 2017, either in person or by teleconference. During 2017, each member of the audit committee
attended all of the meetings of the committee held during the period in which such director was a member of the audit committee.
Compensation
Committee
Members
of the compensation nominating committee are Michael Harnish, James Cochran and Samuel Morris. Mr. Morris chairs the compensation
committee.
The
compensation has the final determination in compensation for our executives. The compensation committee is responsible for considering
and approving the payment of bonuses to executives. There is no set schedule for the payment of bonuses. Bonuses are considered
upon achievement of specified benchmarks, which in the past have included capital and debt raises, operational performance, acquisitions
of significant assets, and entry into agreements accretive to our business. The benchmarks and the amount and type of bonuses
are determined by the committee.
The
compensation committee also is responsible for approving employment agreements with executives.
The
Compensation Committee met once during 2017.
Nominating
and Governance Committee
Members
of the governance and nominating committee are Samuel Morris and Keith Wiggins. Mr. Morris chairs the committee.
The
governance and nominating committee is responsible for identifying individuals whom the Committee believes are qualified to become
board members in accordance with the nominating criteria set forth below, and recommend that the board select such individuals
as nominees to stand for election at each Annual Meeting of Shareholders. In addition, the committee will annually evaluate the
qualifications and performance of incumbent directors and determine whether to recommend them for re-election to the board. In
the case of a board vacancy (including a vacancy created by an increase in the size of the board), the committee is responsible
for recommending to the board in accordance with the nominating criteria an individual to fill such vacancy either through election
by the board or through election by shareholders. The Governance and Nominating Committee met once during 2016.
Summary
of Committee Service
The
following is a table showing board members involvement in each committee:
Name
|
|
Audit
|
|
Compensation
|
|
Nominating/Governance
|
Wayne
Harding
|
|
-
|
|
-
|
|
-
|
Samuel
Morris
|
|
M
|
|
C
|
|
C
|
Michael
Harnish
|
|
C
|
|
M
|
|
-
|
James
Cochran
|
|
-
|
|
M
|
|
-
|
T.
Keith Wiggins
|
|
-
|
|
-
|
|
M
|
Christopher
Bragg
|
|
M
|
|
-
|
|
-
|
|
|
|
|
|
|
|
M
= Member C = Chair
|
|
|
|
|
Limitations
on Liability and Indemnification Matters
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or controlling
persons, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
DIRECTOR
COMPENSATION
Fiscal
Year 2017 Director Compensation
The
following table sets forth information concerning compensation paid to our outside directors for services during 2017:
Name
|
|
Fees
Earned
or Paid In cash
|
|
|
Stock
Award
|
|
|
Total
|
|
Samuel Morris
|
|
$
|
18,000
|
|
|
$
|
34,843
|
|
|
$
|
41,843
|
|
Michael Harnish
|
|
$
|
18,000
|
|
|
$
|
34,843
|
|
|
$
|
41,843
|
|
James Cochran
|
|
$
|
18,000
|
|
|
$
|
34,843
|
|
|
$
|
41,843
|
|
T. Keith Wiggins
|
|
$
|
18,000
|
|
|
$
|
34,843
|
|
|
$
|
41,843
|
|
Christopher Bragg
|
|
$
|
18,000
|
|
|
$
|
34,843
|
|
|
$
|
41,843
|
|
From
September 30, 2016 to August 31, 2017, each outside director receives $1,000 for each meeting attended in person. Directors were
also paid $4,000 per calendar quarter. At the annual meeting of the board of directors on September 7, 2017, the board voted to
award each outside director options for 150,000 shares of common stock. These stock option shares vested 1/8 on the date granted
with the balance equally over seven quarters commencing December 31, 2017. The chair of the audit committee received an additional
20,000 stock options per year. The chair of the compensation committee received an additional 10,000 stock options per year. Committee
chair options vest half immediately, half in six months.
At
the September 7, 2017 board meeting, the Compensation Committee recommended, and the Board approved, to increase each independent
director’s quarterly cash compensation from $4,000 per calendar quarter to $5,000 per calendar quarter.
EXECUTIVE
COMPENSATION
Executive
Compensation
Summary
Compensation Table for 2017
The
following table sets forth certain information concerning compensation paid to each of the individuals who served as executive
officers during 2017:
Name
& Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($) (1)
|
|
|
Option
Awards ($)
|
|
|
Non-equity
incentive plan comp ($)
|
|
|
Non-qualified
deferred comp earnings ($)
|
|
|
All
other comp ($)
|
|
|
Total
($)
|
|
John McKowen,
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
prior
Chief Executive
|
|
|
2016
|
(6,2)
|
|
|
192,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,361
|
|
|
|
204,525
|
|
Officer,
Chairman
|
|
|
2015
|
(3)
|
|
|
258,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,284
|
|
|
|
296,334
|
|
Wayne Harding,
|
|
|
2017
|
(9)
|
|
|
131,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,800
|
|
|
|
234,050
|
|
Chief
Executive
|
|
|
2016
|
(7,4)
|
|
|
131,379
|
|
|
|
-
|
|
|
|
33,093
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,050
|
|
|
|
170,522
|
|
Officer,
Chief
|
|
|
2015
|
(5)
|
|
|
154,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,800
|
|
|
|
161,031
|
|
Financial
Officer, Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Gregorak,
|
|
|
2017
|
(8,10)
|
|
|
120,000
|
|
|
|
2,790
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,800
|
|
|
|
149,590
|
|
Chief
Financial
|
|
|
2016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Officer
& Secretary
|
|
|
2015
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Stock
award compensation is based on stock options or RSUs granted, vested and issued during the year. For payroll tax purposes,
and as reported here, valuation of the RSU grants that are vested is recorded through payroll at a 25% fair value discount
due to large blocks and limitations on selling. This is based on outside executive compensation consultant’s opinion.
For financial statement purposes, the full fair value of the grant is recorded, less expected forfeitures.
|
|
(2)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($2,361) and office allowance ($10,000).
|
|
(3)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($13,284) and office allowance ($25,000).
|
|
(4)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($6,050).
|
|
(5)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($6,800).
|
|
(6)
|
Mr.
McKowen resigned June 2016
|
|
(7)
|
Mr.
Harding was named Chief Executive Officer in June 2016 and became Chairman in September 2016. Mr. Harding was named interim
Chief Financial Officer effective February 9. 2018.
|
|
(8)
|
Mr.
Gregorak was named Chief Financial Officer in March of 2017 and resigned on February 1, 2018.
|
|
(9)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($9,800).
|
|
(10)
|
Other
Compensation is the payment of the health insurance benefit by the Company ($4,800)
|
Grants
and Issuance of Plan-Based Awards for 2017 and 2016
For
the year ended December 31, 2016, the Company issued 225,000 options to purchase shares of common stock to Wayne Harding, with
64,286 shares vested by December 31, 2017.
For
the year ended December 31, 2016, the Company issued 600,000 options to purchase shares of common stock to Wayne Harding, 200,000
with immediate vesting, 400,000 with vesting in future years.
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth certain information as to unexercised restricted stock units held on December 31, 2017 by the named
executive officer.
|
|
Stock
Awards
|
|
Name
|
|
Number
of Options that have vested (#)
|
|
|
Market
value of Options that have vested ($)(1)
|
|
|
Options
that have not vested (#)
|
|
|
Market
value of stock options that have not vested ($)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne Harding
|
|
|
464,286
|
|
|
|
92,000
|
|
|
|
360,714
|
|
|
|
144,286
|
|
William Gregorak
|
|
|
150,000
|
|
|
|
22,000
|
|
|
|
525,000
|
|
|
|
210,000
|
|
(1)
The closing price of our common stock on OTCQB on December 31, 2017 was $0.59
Option
Exercises and Stock Vested in 2017
Mr.
Harding, our sole executive officer has no RSU holdings. In 2016 he was granted 600,000 stock options, 200,000 of which vested
immediately with the remainder vesting in future years. In September of 2017, he was granted 225,000 stock options, 64,286 of
which vested immediately with the remainder vesting in future years.
Employment
and Change in Control Agreements
We
entered into an employment agreement with Wayne Harding effective as of January 1, 2011. This employment agreement renews automatically
for successive one-year terms until either party delivers notice of termination within 30 days of the expiration of the then-current
term.
Under
each agreement, annual base salary and other compensation is to be reviewed, and may be adjusted upward, no less frequently than
quarterly. Mr. Harding’s annual base salary has been $120,000 per year until November 2016, when his salary was increased
to $150,000 per year.
On
August 22, 2017, Mr. Harding entered into a new compensation agreement. This agreement contains the same terms as the prior agreement
with the exception of the expanded definition of “Early Termination: Resignation by the Employee for Good Reason.”
This definition has been expanded to include the election or appointment of 50% or more new members of the Company’s board.
The
employment agreement provides that Mr. Harding will be entitled, in the event his employment is terminated during the term by
us without cause (as defined) or by him for good reason (as defined), to (a) receive an amount in cash equal to six months’
base salary at the highest base salary in effect during the twelve months prior to termination plus the amount of the annual bonus,
if any, paid to him for the preceding fiscal year, prorated to the termination date and (b) immediate vesting of all non-vested
stock options. The agreement also provides for immediate vesting of all non-vested stock options in the event of a change in control,
which generally is defined to be a sale or other disposition to a person, entity or group of 50% or more of our consolidated assets.
The following table sets forth estimated compensation that would have been payable to Mr. Harding upon termination of employment,
assuming termination took place on December 31, 2017, whether in connection with a change in control or otherwise. Mr. Harding
held unvested options as of December 31, 2017, and therefore would have been entitled to additional compensation had a change
in control occurred as of December 31, 2017.
Potential
Payments Upon Termination or Change in Control
Name
|
|
Acceleration
of Compensation Upon Change of Control
|
|
|
Acceleration
of Compensation Upon Termination
|
|
Wayne Harding
|
|
$
|
150,000
|
|
|
$
|
75,000
|
|
Equity
Plans
2011
Long-Term Stock Incentive Plan
In
2011 the board of directors adopted the 2011 Long-Term Stock Incentive Plan, or the 2011 Plan. The 2011 Plan and we expect our
shareholders to approve the 2016 Plan prior to the completion of this offering. The 2016 Plan became effective immediately on
adoption.
Share
Reserve
: 10,000,000 shares of common stock.
Participation
:
All employees may participate while employed with by us or any of our subsidiaries.
Administration.
The 2016 Plan may be administered by the board of directors or its compensation committee. The compensation committee, in
its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted, and
the terms of such awards.
Types
of Awards.
The 2016 Plan permits the granting of any or all of option, stock appreciation right, restricted stock award, restricted
stock unit awards, performance awards, other stock-based award or performance compensation award.
Purchase
of Securities Pursuant to the Plan and Payment for Securities Offered
:
|
●
|
Participation
is allowed at the market price per share, or in amounts to be set by the board.
|
|
|
|
|
●
|
Payment
for the securities purchased may only be in cash or through services.
|
|
|
|
|
●
|
Employees
are not required to contribute to the 2011 Plan.
|
|
|
|
|
●
|
Employees
and the registrant are not required to contribute to the 2011 Plan.
|
|
|
|
|
●
|
Reports
are not made to employees participating in the 2011 Plan, and the Plan does not hold assets for employees’ accounts.
|
|
|
|
|
●
|
Securities
will not be purchased for the 2011 Plan in either the open market or through private transactions.
|
Resale
Restrictions
: There are no resale restrictions on plan participants, except in the event the participant is an officer, director
or affiliate, or in the event that the 2011 Plan contains a repurchase right of issuer, for any stock, or options, as a pre-condition
of resale.
Tax
Effects of 2011 Plan Participation
: Participants will be taxed upon any shares issued for services provided or for awards.
Participants will not be taxable on stock options issued to employees at the market price on date of grant.
Investment
of Funds
: No assets are held under the 2011 Plan.
Withdrawal
from the 2011 Plan; Assignment of Interest
:
|
●
|
Employees
may refuse to accept compensation or options.
|
|
|
|
|
●
|
No
assignment of an interest in the 2011 Plan is possible; stock or options received under the 2011 Plan may be assigned, subject
to the terms of the 2011 Plan, including the Right to repurchase as defined therein.
|
Forfeitures
and Penalties
: Except as otherwise determined by the 2011 Plan administrator, at the time of the award, upon termination of
a participant’s continuous service during the applicable restriction period, the participant’s restricted stock, that is at that
time subject to restrictions shall be forfeited and reacquired by us; provided that the 2011 Plan administrator may provide, by
rule or regulation or in any award agreement, or may determine in any individual case, that restrictions or forfeiture conditions
relating to restricted stock shall be waived in whole or in part in the event of terminations resulting from specified causes,
and the 2011 Plan administrator may in other cases waive in whole or in part the forfeiture of restricted stock.
Term,
Termination and Amendment of 2011 Plan.
Unless terminated earlier by the board of directors, the 2011 Plan will terminate,
and no further awards may be granted, ten years after the date on which it is approved by our shareholders. The board may amend,
suspend or terminate the 2011 Plan at any time, except that, if required by applicable law, regulation or stock exchange rule,
shareholder approval will be required for any amendment. The amendment, suspension or termination of the 2011 Plan or the amendment
of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights
under an outstanding award.
2005
Stock Option Plan
On
May 6, 2005, the board of directors adopted the 2005 Stock Option Plan, the 2005 Plan, pursuant to which the board may grant options
to purchase a maximum of 5,000,000 shares of common stock to key employees, directors and consultants. The option plan only provides
for the grant of nonqualified stock options. The 2005 Plan was superseded by the 2011 Plan.
The
board of directors adopted our 1998 Stock Option Plan, or the 1998 Plan, in April 1998We previously adopted our 2005 Stock Option
Plan, or the 2005 Plan. The 2005 Plan was superseded by the 2011 Plan. The 1998 Plan was amended by the board in May 1999, December
2001 and March 2004, and those amendments were approved by our shareholders. No additional options may be granted pursuant to
the 1998 2005 Plan, but the 1998 2005 Plan will continue to govern the terms and conditions of the outstanding options previously
granted thereunder.
RELATED-PARTY
TRANSACTIONS
The
following is a description of transactions since January 1, 2017 to which we have been a party, in which the amount involved exceeded
or will exceed $120,000, and in which any of our directors, executive officers or beneficial owners of more than 5% of any series
or class of our preferred or common stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect
material interest, other than compensation, termination and change-in-control arrangements.
Since
January 1, 2017 there have been the following related-party transactions, except for the compensation arrangements described under
“Executive Compensation” and “Director Compensation”:
|
●
|
With
respect to Wayne Harding, our Chief Executive Officer and Interim Chief Financial Officer:
|
|
●
|
Mr.
Harding provided a 12% short term loan to us of $25,000, which loan was secured by land assets and paid off.
|
|
|
|
|
●
|
Mr.
Harding provided a short-term loan to the Company of $12,500 in the third quarter of 2017 , which loan is initially
unsecured but will become secured by land assets if not paid within 30 days of the note by land assets.
|
|
|
|
|
●
|
Mr.
Harding provided an 18% long-term loan to us of $50,000, which loan is secured by land assets.
|
|
●
|
With
respect to Johnny Cannaseed, LLC, which is majority owned by our former Chief Executive Officer John McKowen:
|
|
●
|
We
lease our former corporate headquarters office space to Johnny Cannaseed. Total lease payments are $47,000 per year.
|
|
|
|
|
●
|
We
made advances to Johnny Cannaseed, LLC totaling $34,400 in 2017, resulting in a cumulative total of $72,999, for greenhouse
expenses.
|
|
|
|
|
●
|
We
recorded revenue totaling $620,000for leasing income from Johnny Cannaseed for 2017.
|
|
|
|
|
●
|
At
December 31, 2017, we had accounts receivable due from Johnny Cannaseed of $19,000.
|
|
●
|
With
respect to McGrow, LLC, which is partially owned by our former Chief Executive Officer John McKowen, we made advances to McGrow,
LLC totaling $26,957, resulting in a cumulative total of $43,798 for greenhouse expenses.
|
|
|
|
|
●
|
With
respect to MCG Services, LLC, which is majority owned by our former Chief Executive Officer John McKowen:
|
|
●
|
GrowCo
made payments totaling $335,531 to MCG Services, LLC for costs associated with a services agreement.
|
|
|
|
|
●
|
We
made advances to MCG Services, LLC totaling $13,295.
|
|
●
|
We
made payments totaling $11,210 to John McKowen, our former Chief Executive Officer, for interest expense on a loan made by
Mr. McKowen to GrowCo.
|
|
|
|
|
●
|
A
trust affiliated with Thomas Prasil, who then beneficially owned more than five percent of the common stock, invested $11.0M
in GrowCo securities.
|
PRINCIPAL
AND SELLING SHAREHOLDERS
Transactions
with Selling Shareholder
On
February 9, 2018, we entered into a securities purchase agreement with Powderhorn I, LP, or Powderhorn, pursuant to which we issued
to Powderhorn a 12.5% original issue discount convertible promissory note, or the Note, in the principal amount of $675,000 in
exchange for $600,000 in cash.
We
have filed the registration statement of which this prospectus is a part in order to register the resale of up to 8,000,000 shares
of common stock by Powderhorn that may be issued upon conversion of the Note. Under the securities purchase agreement, we initially
agreed to use our reasonable best efforts to have the registration statement declared effective by the Securities and Exchange
Commission, or SEC, by April 11, 2018. On April 2, 2018, Powderhorn agreed, effective upon a specified amortization payment we
made on April 9, 2018, to defer our obligation to have the registration statement declared effective until May 8, 2018. Subject
to certain permitted exceptions, if the SEC does not declare the registration statement effective by May 8, 2018 or if we fail
to keep the registration statement effective, we will be required to pay liquidated damages to Powderhorn.
The
Note, which is due on February 9, 2019, bears interest at the rate of 12.5% per annum. The Note is subordinated in payment. All
principal of, and accrued interest on, the Note is convertible at any time, at Powderhorn’s election, into shares of common
stock at a conversion price equal to $0.30. We have the right to prepay all or any portion of the Note at any time upon ten days’
written notice to Powderhorn. For the purpose of securing our obligations under the Note, TR El Paso Land, LLC, our wholly owned
subsidiary, granted a deed of trust conveying certain property to Powderhorn and a limited recourse guarantee in favor of Powderhorn.
The Note contains customary default events that, if triggered and not timely cured, will result in default interest and penalties.
Beginning
on March 6, 2018 and on the same day of each and every calendar month thereafter for a period of twelve months, or each an Amortization
Payment Date, we make monthly payments under the Note to Powderhorn in the amount of $63,000, consisting of one-twelfth of the
principal balance and all accrued but unpaid interest under the Note, or each an Amortization Payment.
Each
Amortization Payment shall be made, at our option, (a) in cash in an amount equal to 1.05 multiplied by the Amortization Payment,
or Cash Amortization Payment Rate, or (b) subject to our complying with the Equity Conditions (as defined in the Note), in common
stock, in whole or in part at the sole discretion of Powderhorn, by applying the Amortization Conversion Price (as defined below)
as of the date of issuance of the common stock. In the event that Powderhorn is receiving any Amortization Payment in the form
of common stock, the common stock issuable in satisfaction of such Amortization Payment will not be issued until such time as
Powderhorn has requested such issuance, and the Amortization Conversion Price will be applied as of the date of such request by
Powderhorn for issuance of common stock. Powderhorn may request an unlimited amount of issuances of common stock as partial payment
totaling the sum of such Amortization Payment. Notwithstanding the foregoing, Powderhorn may (i) by delivering written notice
to the Company at least ten Trading Days prior to an Amortization Payment Date, or Acceleration Notice, require that up to a total
of three Amortization Payments be made on such Amortization Payment Date (including the Amortization Payment scheduled to be made
on such Amortization Payment Date), each of which Amortization Payments severally shall be payable, at the option of the Company,
in cash at the Cash Amortization Payment Rate or, subject to the Company complying with the Equity Conditions, in common stock
by applying the Amortization Conversion Price or (ii) in Powderhorn’s sole discretion, Powderhorn may at any time after
an Amortization Payment Date, require that up to two additional Amortization Payments be made, provided that the entire amount
of such two additional Amortization Payments will be made in common stock, in such amounts and at such times as Powderhorn will
request in its sole discretion, by applying the applicable Amortization Conversion Price at the time of issuance, in accordance
with the foregoing. Powderhorn may exercise its rights set forth in the preceding sentence with respect to an unlimited number
of Amortization Payment Dates, until all Amortization Payments have been made, and any Amortization Payment or Payments for which
payment is accelerated pursuant to the preceding sentence shall be deemed to apply to the latest Amortization Payment Date.
Any
amount of principal or interest on the Note that is not paid by the maturity date shall be repaid at 110% of such unpaid amount.
Interest shall commence accruing on the date that the Note is issued and shall be computed on the basis of a 360-day year and
the actual number of days elapsed.
In
no event shall Powderhorn be entitled to convert any portion of the Note if such conversion would result in beneficial ownership
by Powderhorn and its affiliates of more than 4.99% of the outstanding shares of the common stock. For purposes of the preceding
sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, except
that the limitations on conversion may be waived (up to a maximum of 9.99%) by Powderhorn upon not less than 61 days’ prior
notice to us, and the provisions of the conversion limitation shall continue to apply until such sixty-first day.
Beneficial
Ownership
The
following table sets forth information regarding the beneficial ownership of common stock as of March 31, 2018, by:
|
●
|
each
person, or group of affiliated persons, who is known by us to own beneficially more than five percent of the outstanding shares
of common stock;
|
|
|
|
|
●
|
each
of our directors;
|
|
|
|
|
●
|
each
of our executive officers;
|
|
|
|
|
●
|
all
of our directors and executive officers as a group; and
|
|
|
|
|
●
|
Powderhorn,
the selling shareholder.
|
The
following table lists the percentage of shares beneficially owned as of January 22, 2018, based on 32,937,045 shares of common
stock outstanding. Beneficial ownership is determined in accordance with the rules of the SEC, and thus it represents sole or
shared voting or investment power with respect to shares of common stock. Shares of common stock subject to options currently
exercisable or exercisable by May 30, 2018 (sixty days after March 31, 2018) are deemed outstanding and beneficially owned by
the person holding such options for purposes of computing the number of shares and percentage beneficially owned by such person,
but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated
in the footnote to the below table, and subject to applicable community property laws, the persons named have sole voting and
investment power with respect to all shares of common stock shown as beneficially owned by them.
|
|
Shares
Beneficially Owned Before this Offering
|
|
|
Shares
Beneficially Owned After
this Offering
|
|
Name
of Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
5% Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
R. McKowen
456 Madison Street
Denver, Colorado 80206
|
|
|
3,515,568
|
|
|
|
10.7
|
%
|
|
|
3,515,568
|
|
|
|
8.6
|
%
|
Directors and Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne Harding(1)
|
|
|
1,204,518
|
|
|
|
3.7
|
|
|
|
1,204,518
|
|
|
|
2.9
|
|
Samuel Morris
|
|
|
466,435
|
|
|
|
1.4
|
|
|
|
466,435
|
|
|
|
1.1
|
|
Michael Harnish
|
|
|
221,786
|
|
|
|
*
|
|
|
|
221,786
|
|
|
|
*
|
|
James Cochran
|
|
|
406,502
|
|
|
|
1.2
|
|
|
|
406,502
|
|
|
|
1.0
|
|
T. Keith Wiggins
|
|
|
429,403
|
|
|
|
1.3
|
|
|
|
429,403
|
|
|
|
1.0
|
|
Christopher Bragg
|
|
|
140,787
|
|
|
|
*
|
|
|
|
140,787
|
|
|
|
*
|
|
All directors and
executive officers as a group (6 persons)(1)
|
|
|
2,869,431
|
|
|
|
8.7
|
|
|
|
2,869,431
|
|
|
|
7.0
|
|
Selling
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powderhorn I, LP(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,000,000
|
|
|
|
19.5
|
|
|
*
|
Less
than 1%.
|
|
(1)
|
Includes
(a) 6,666 shares owned by an individual retirement account for the benefit of Mr. Harding’s spouse and (b) • shares
that may be acquired by Mr. Harding pursuant to options vested as of May 30, 2018.
|
|
(2)
|
Powderhorn
is a Delaware limited partnership. Marc Manuel is the managing member of R3 Equity LLC, ,the manager of Powderhorn, and has
sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of all securities owned directly
by Powderhorn. The business address of Powderhorn is c/o Lucosky Brookman LLP, 101 Wood Avenue South 5th Floor, Iselin, NJ.
The 8,000,000 shares consist of common stock issuable to Powderhorn upon conversion of the Note. The Note is subject to a
blocker provision that prevents Powderhorn from converting the note into shares of common stock if its beneficial ownership
of the common stock would exceed 4.99% (subject to adjustment not to exceed 9.99%) of the common stock outstanding. As of
March 31, 2018, Powderhorn would beneficially own 19.5% of our issued and outstanding common stock without giving effect to
this blocker.
|
For
purposes of the table above, the address of each of our directors and executive officers is in care of Two Rivers Water &
Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014.
DESCRIPTION
OF CAPITAL STOCK
General
Our
authorized capital stock consists of 200,000,000 shares of common stock, $0.001 par value per share. The following description
does not purport to be complete.
As
of March 31, 2018, 32,937,045 shares of common stock were outstanding. As of that date, up to 57,505,526 additional shares of
common stock could be issued, as follows:
|
●
|
up
to 8,000,000 shares of common stock were issuable upon conversion of a 12.5% original issue discount convertible promissory
note issued to Powderhorn I, LP, or Powderhorn, which shares may be offered and sold pursuant to this prospectus from time
to time;
|
|
|
|
|
●
|
up
to 29,881,698 shares of common stock were issuable upon conversion of preferred units of TR Capital Partners, LLC;
|
|
|
|
|
●
|
up
to 118,000 shares of common stock were issuable pursuant to restricted stock units vesting without an exercise price;
|
|
|
|
|
●
|
up
to 16,469,328 shares of common stock were issuable upon exercises of outstanding warrants (for additional details, please
see the description under “Warrants” in Note 7, Equity Transactions, to the consolidated financial statements
included elsewhere herein); and
|
|
|
|
|
●
|
up
to 3,036,500 shares of common stock were issuable upon the exercise of outstanding options.
|
Common
Stock
Voting
Rights: Each share of common stock is entitled to one vote on all matters presented to shareholders. Shareholders do not have
the ability to cumulate votes for the election of directors.
Dividends.
Subject to preferences that may be applicable to any then-outstanding preferred stock, the holders of our outstanding shares of
common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of
legally available funds. At present, we have no plans to issue dividends. See “Dividend Policy.”
Liquidation.
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net
assets legally available for distribution to shareholders after the payment of all of our debts and other liabilities, subject
to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Other
Rights and Preferences. Other than as described above, holders of common stock have no preemptive, conversion or subscription
rights, and there are no redemption or sinking fund provisions applicable to common stock. The rights, preferences and privileges
of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate and issue in the future.
Fully
Paid and Nonassessable. All of our outstanding shares of common stock are fully paid and nonassessable.
Registration
Rights
Under
the exchange agreement dated as of January 31, 2014 that we entered into with TR Capital Partners, LLC, or TR Capital, we granted
holders of preferred units in TR Capital a one-time demand registration rights under which we 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 31, 2018, we could be required 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.
We
have filed the registration statement of which this prospectus is a part in order to register the resale of up to 8,000,000 shares
of common stock by Powderhorn that may be issued upon conversion of the Note. Under our securities purchase agreement with Powderhorn,
we initially agreed to use our reasonable best efforts to have the registration statement declared effective by the SEC by April
11, 2018. On April 2, 2018, Powderhorn agreed, effective upon a specified amortization payment we made on April 9, 2018, to defer
our obligation to have the registration statement declared effective until May 8, 2018. Subject to certain permitted exceptions,
if the SEC does not declare the registration statement effective by May 8, 2018 or if we fail to keep the registration statement
effective, we will be required to pay liquidated damages to Powderhorn.
Anti-Takeover
Effects of Certain Provisions of Colorado Law, Our Articles of Incorporation and Bylaws
Colorado
corporation law, our Articles of Incorporation and our Bylaws contain a number of provisions that could make our acquisition by
means of a tender or exchange offer, a proxy contest or otherwise more difficult. These provisions are summarized below.
|
●
|
Shareholder
Action by Written Consent
. Our Bylaws provide that shareholders may take action in writing only by unanimous written consent,
which has the same practical effect as a prohibition on shareholder written actions. This means that shareholders can only
take action at an annual or special shareholders meeting.
|
|
|
|
|
●
|
Removal
of Directors
. Our Bylaws provide that our directors may only be removed by the affirmative vote of two-thirds of the shares
entitled to vote at an election of directors, with or without cause.
|
|
|
|
|
●
|
Special
Meetings
. Special meetings of shareholders can only be called by the board of directors or at the request of holders of
at least 10% of the shares outstanding and entitled to vote.
|
|
|
|
|
●
|
Undesignated
Preferred Stock
. The ability to authorize undesignated preferred stock makes it possible for our board to issue preferred
stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. These and other
provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our Company.
|
These
provisions of Colorado corporation law, our articles of incorporation and our bylaws could have the effect of discouraging others
from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our
common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions
that shareholders may otherwise deem to be in their best interests.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Broadridge Financial Solutions, 1717 Arch St., Suite 1300, Philadelphia,
Pennsylvania 19103, phone: (215) 553-5400.
PLAN
OF DISTRIBUTION
The
selling shareholder may, from time to time, sell, transfer or otherwise dispose of any or all of its shares of common stock offered
by this prospectus, or interests in such shares of common stock, on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. As used in this prospectus, the “selling shareholder” refers to Powderhorn
I, LP and any donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares
of common stock received after the date of this prospectus from a selling shareholder as a gift, pledge, partnership distribution
or other transfer.
The
selling shareholder may use any one or more of the following methods when disposing of shares or interests therein:
|
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block
as principal to facilitate the transaction;
|
|
|
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
●
|
privately
negotiated transactions;
|
|
|
|
|
●
|
short
sales;
|
|
|
|
|
●
|
through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
|
|
|
|
|
●
|
broker-dealers
may agree with the selling shareholder to sell a specified number of such shares at a stipulated price per share;
|
|
|
|
|
●
|
a
combination of any such methods of sale; and
|
|
|
|
|
●
|
any
other method permitted pursuant to applicable law.
|
The
selling shareholder may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned
by it and, if it defaults in the performance of its secured obligations, the pledgees or secured parties may offer and sell the
shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the identities of selling shareholders to include the pledgee, transferee
or other successors in interest as the selling shareholder under this prospectus. The selling shareholder also may transfer the
shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be
the selling beneficial owners for purposes of this prospectus; provided, however, that prior to any such transfer the following
information (or such other information as may be required by the federal securities laws from time to time) with respect to each
such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as
appropriate: (1) the name of the selling beneficial owner; (2) any material relationship the selling beneficial owner has had
within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned
by such beneficial owner before the offering; (4) the amount to be offered for the beneficial owner’s account; and (5) the
amount and (if one percent or more) the percentage of the class to be owned by such beneficial owner after the offering is complete.
In
connection with the sale of common stock or interests therein, the selling shareholder may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging
the positions they assume. The selling shareholder may also sell shares of common stock short and deliver these securities to
close out its short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The
selling shareholder may also enter into option or other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution
of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The
aggregate proceeds to the selling shareholder from the sale of the common stock offered by it will be the purchase price of the
common stock less discounts or commissions, if any. The selling shareholder reserves the right to accept and, together with its
agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering.
The
selling shareholder also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under
the Securities Act of 1933, or the Securities Act, provided that it meets the criteria and conform to the requirements of that
rule.
The
selling shareholder and any underwriters, broker-dealers or agents, or their affiliates, that participate in the sale of the common
stock or interests therein are “underwriters” within the meaning of Section 2(11) of the Securities Act. Any discounts,
commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the
Securities Act. Any selling shareholder that is an “underwriter” within the meaning of Section 2(11) of the Securities
Act will be subject to the prospectus delivery requirements of the Securities Act.
To
the extent required, the shares of common stock to be sold, the name of the selling shareholder, the respective purchase prices
and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect
to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment
to the registration statement that includes this prospectus.
The
maximum amount of compensation to be received by any Financial Industry Regulatory Authority member or independent broker-dealer
for the sale of any securities registered under this prospectus will not be greater than 8.0% of the gross proceeds from the sale
of such securities.
In
order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only
through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has
been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied
with.
Expenses;
Indemnification
We
will not receive any of the proceeds from the sale of resale shares by the selling shareholder and will bear all expenses related
to the registration of this offering, but will not pay for any commissions, fees or discounts, if any, relating to the sale of
resale shares by the selling shareholder. We have agreed to indemnify the selling shareholder against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
Supplements
In
the event of a material change in the plan of distribution disclosed in this prospectus, the selling shareholder will not be able
to effect transactions in the resale shares pursuant to this prospectus until such time as a post-effective amendment to the registration
statement is filed with, and declared effective by, the SEC.
Regulation
M
We
have informed Powderhorn that it is required to comply with Regulation M promulgated under the Securities Exchange Act of 1934,
or the Exchange Act, with respect to any purchase or sale of the common stock. In general, Rule 102 under Regulation M prohibits
any person connected with a distribution of common stock from directly or indirectly bidding for, or purchasing for any account
in which it has a beneficial interest, any of the resale shares or any right to purchase the resale shares, for a period of one
trading day before and after completion of its participation in the distribution.
During
any distribution period, Regulation M prohibits the selling shareholder and any other persons engaged in the distribution from
engaging in any stabilizing bid or purchasing the common stock except for the purpose of preventing or retarding a decline in
the open market price of the common stock. None of these persons may affect any stabilizing transaction to facilitate any offering
at the market.
We
have also advised Powderhorn that it should be aware that the anti-manipulation provisions of Regulation M under the Exchange
Act will apply to purchases and sales of common stock by such selling shareholder, and that there are restrictions on market-making
activities by persons engaged in the distribution of the resale shares. Under Regulation M, neither the selling shareholder nor
its agents may bid for, purchase, or attempt to induce any person to bid for or purchase, shares of common stock while distributing
resale shares. Regulation M may prohibit the selling shareholder from covering short sales by purchasing resale shares while the
distribution is taking place, despite any contractual rights to do so pursuant to conversion of the Note. We have advised Powderhorn
that it should consult with its own legal counsel to ensure compliance with Regulation M.
LEGAL
MATTERS
The
validity of the shares of common stock being offered is being passed upon for us by Faegre Baker Daniels LLP, Denver, Colorado.
EXPERTS
M&K
CPAS LLP, an independent registered public accounting firm, has audited our consolidated financial statements included elsewhere
in this prospectus for the year ended December 31, 2017, as set forth in their report included elsewhere in this prospectus. Such
financial statements are included in reliance on M&K CPAS LLP’s report, given on their authority as experts in accounting
and auditing.
Eide
Bailly LLP, an independent registered public accounting firm, has audited our consolidated financial statements included elsewhere
in this prospectus for the year ended December 31, 2016, as set forth in their report included elsewhere in this prospectus. Such
financial statements are included in reliance on Eide Bailly LLP’s report, given on their authority as experts in accounting
and auditing. Eide Bailly LLP notified us on November 28, 2017 of its decision to resign as our independent registered public
accounting firm. During the fiscal year ended December 31, 2016, and in the subsequent interim period through April 10, 2018,
there were no disagreements with Eide Bailly LLP on any matters of accounting principles or practices, financial statement disclosure
or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Eide Bailly LLP, would have caused
Eide Bailly LLP to make reference to the matter in their report on the consolidated financial statements for such year.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
are required to file annual and quarterly reports and other information with the SEC. You may read and copy any materials we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549. Please call 1-800-SEC-0330
for further information on the operation of the Public Reference Room. Our filings will also be available to the public from commercial
document retrieval services and at the web site maintained by the SEC at www.sec.gov. Our reports and other information that we
have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part of this
prospectus.
We
have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of common stock being offered in this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information
with respect to the shares of common stock offered hereby, we refer you to the registration statement and the exhibits and schedules
filed therewith. Statements contained in this prospectus as to the contents of any contract, agreement or any other document are
summaries of the material terms of such contract, agreement or other document and are not necessarily complete. With respect to
each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to
the exhibits for a more complete description of the matter involved.
TWO
RIVERS WATER & FARMING COMPANY
CONSOLIDATED
FINANCIAL STATEMENTS
To
the Board of Directors and
Stockholders of Two Rivers Water & Farming Company
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheet of Two Rivers Water & Farming Company (the Company) as of December
31, 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended
December 31, 2017, and the related notes and schedules (collectively referred to as the consolidated financial statements). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity
with accounting principles generally accepted in the United States of America. The consolidated financial statements of Two Rivers
Water & Farming Company as of December 31, 2016, were audited by other auditors whose report dated March 29, 2017 expressed
an unqualified opinion on those consolidated statements.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audit provides a reasonable basis for our opinion.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 10 to the consolidated financial statements, the Company suffered a net loss from operations and has a net
capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans
regarding those matters are described in Note 10. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
M&K CPAS, PLLC
We
have served as the Company’s auditor since 2017.
Houston,
TX
April
9, 2018
To
the Board of Directors and Stockholders of
Two
Rivers Water & Farming Company
Denver,
Colorado
We
have audited the accompanying consolidated balance sheet of Two Rivers Water & Farming Company (the “Company”)
as of December 31, 2016, and the related consolidated statements of operations, changes in stockholders’ equity, and cash
flows for the year then ended. Two Rivers Water & Farming Company’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Two Rivers Water & Farming Company as of December 31, 2016, and the results of its operations and its cash flows for the
year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
As
discussed in Note 3 to the consolidated financial statements, the Company has made plans to discontinue its farming operations
as of December 31, 2016. Our opinion is not modified with respect to this matter.
As
discussed in Note 9 to the consolidated financial statements, the Company made immaterial error corrections to restate the previously
filed balance sheet for the year ended December 31, 2016. Accordingly, amounts reported for long term assets for land and water,
and the liabilities for discontinued operations and notes payable, net of current portion have been restated in the December 31,
2016 financial statements now presented. Our opinion is not modified with respect to this matter.
/s/
Eide Bailly, LLP
Denver,
Colorado
March 29, 2017
Consolidated
Balance Sheets
(In
thousands, except for number of shares)
|
|
|
December
31, 2017
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
(As
Restated)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14
|
|
|
$
|
150
|
|
Accounts receivable,
net
|
|
|
5
|
|
|
|
-
|
|
Accounts receivable,
related party
|
|
|
19
|
|
|
|
240
|
|
Deposits and other
current assets
|
|
|
32
|
|
|
|
5
|
|
Assets
of discontinued operations held for sale
|
|
|
-
|
|
|
|
2,785
|
|
Total
Current Assets
|
|
|
70
|
|
|
|
3,180
|
|
Long
Term Assets:
|
|
|
|
|
|
|
|
|
Property, equipment
and software, net
|
|
|
160
|
|
|
|
599
|
|
Land
|
|
|
3,505
|
|
|
|
3,803
|
|
Water assets
|
|
|
25,016
|
|
|
|
31,183
|
|
Greenhouse &
infrastructure, net
|
|
|
5,955
|
|
|
|
5,402
|
|
Construction in
progress
|
|
|
3,361
|
|
|
|
3,520
|
|
Other
long term assets
|
|
|
85
|
|
|
|
80
|
|
Total
Long Term Assets
|
|
|
38,082
|
|
|
|
44,587
|
|
TOTAL
ASSETS
|
|
$
|
38,152
|
|
|
$
|
47,767
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES &
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,553
|
|
|
$
|
1,495
|
|
Accrued liabilities
|
|
|
1,837
|
|
|
|
695
|
|
Current portion
of notes payable, net of discount
|
|
|
17,419
|
|
|
|
10,780
|
|
Preferred dividend
payable
|
|
|
3,968
|
|
|
|
3,105
|
|
Liabilities
of discontinued operations held for sale
|
|
|
-
|
|
|
|
2,841
|
|
Total
Current Liabilities
|
|
|
24,777
|
|
|
|
18,916
|
|
Notes
Payable, net of current portion
|
|
|
1,238
|
|
|
|
5,556
|
|
Total
Liabilities
|
|
|
26,015
|
|
|
|
24,472
|
|
Commitments &
Contingencies (Notes 5, 8, 11, 13)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001
par value, 100,000,000 shares authorized, 32,749,920 shares issued and outstanding at December 2017 and 30,452,075 at December
31, 2016
|
|
|
34
|
|
|
|
31
|
|
Preferred shares, $0.001 par value,
5,000,000 shares authorized, 64,935 shares issued and outstanding at December 31, 2017.
|
|
|
252
|
|
|
|
-
|
|
Additional paid-in
capital
|
|
|
77,267
|
|
|
|
75,142
|
|
Accumulated
(deficit)
|
|
|
(97,168
|
)
|
|
|
(84,244
|
)
|
Total Two Rivers
Water Company Shareholders’ Equity
|
|
|
(19,615
|
)
|
|
|
(9,071
|
)
|
Noncontrolling
interest in subsidiaries
|
|
|
31,752
|
|
|
|
32,366
|
|
Total
Stockholders’ Equity
|
|
|
12,137
|
|
|
|
23,295
|
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
38,152
|
|
|
$
|
47,767
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated
Statements of Operations
(In
thousands, except for Loss per Share)
|
|
Twelve
Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
Leasing
- Greenhouse
|
|
$
|
620
|
|
|
$
|
204
|
|
Other
|
|
|
72
|
|
|
|
68
|
|
Total Revenue
|
|
|
692
|
|
|
|
272
|
|
Direct cost of
revenue
|
|
|
(33
|
)
|
|
|
-
|
|
Gross Margin
|
|
|
659
|
|
|
|
272
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,078
|
|
|
|
3,711
|
|
Asset impairment
|
|
|
6,900
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
420
|
|
|
|
166
|
|
Total
operating expenses
|
|
|
9,398
|
|
|
|
3,877
|
|
Loss from Operations
|
|
|
(8,739
|
)
|
|
|
(3,605
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,616
|
)
|
|
|
(1,780
|
)
|
Warrant expense
|
|
|
(331
|
)
|
|
|
(327
|
)
|
Other
income (expense)
|
|
|
33
|
|
|
|
17
|
|
Total
other income (expense)
|
|
|
(2,914
|
)
|
|
|
(2,090
|
)
|
Net Loss from Continuing
Operations before Taxes
|
|
|
(11,653
|
)
|
|
|
(5,695
|
)
|
Income tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
Net
Loss from discontinued operations
|
|
|
(1,045
|
)
|
|
|
(2,624
|
)
|
Net Loss before Preferred
Dividends and Non-Controlling Interest
|
|
|
(12,698
|
)
|
|
|
(8,319
|
)
|
Net loss attributable to noncontrolling
interest
|
|
|
637
|
|
|
|
200
|
|
Preferred distributions
|
|
|
(863
|
)
|
|
|
(2,608
|
)
|
Net
(Loss) attributed to Two Rivers Water & Farming Company Common Shareholders
|
|
$
|
(12,924
|
)
|
|
$
|
(10,727
|
)
|
(Loss)
Per Share - Basic and Dilutive
|
|
$
|
(0.40
|
)
|
|
$
|
(0.38
|
)
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
and dilutive
|
|
|
32,118
|
|
|
|
28,147
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
Twelve
Months Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net
loss, before NCI
|
|
$
|
(13,561
|
)
|
|
$
|
(10,927
|
)
|
Adjustments to reconcile
net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
421
|
|
|
|
839
|
|
Accretion of debt
discount
|
|
|
469
|
|
|
|
199
|
|
Asset impairment
|
|
|
6,900
|
|
|
|
-
|
|
(Gain) loss from
debt extinguishment
|
|
|
(337
|
)
|
|
|
62
|
|
Write off of Suncanna
receivable and advance
|
|
|
-
|
|
|
|
910
|
|
Stock compensation
and warrant expense
|
|
|
1,287
|
|
|
|
477
|
|
In-kind distributions
|
|
|
-
|
|
|
|
495
|
|
Loss (Gain) on write
down of intangible assets related to farming operations
|
|
|
-
|
|
|
|
887
|
|
Loss (Gain) from
disposal of fixed assets related to farming operations
|
|
|
387
|
|
|
|
343
|
|
Net change in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in accounts
receivable
|
|
|
32
|
|
|
|
73
|
|
Decrease (increase)
in accounts receivable, related party
|
|
|
221
|
|
|
|
(240
|
)
|
Decrease in farm
product
|
|
|
-
|
|
|
|
81
|
|
Decrease in deposits,
prepaid expenses and other assets
|
|
|
25
|
|
|
|
29
|
|
(Decrease) increase
in accounts payable
|
|
|
(619
|
)
|
|
|
1,905
|
|
Increase in distribution
payable to preferred shareholders
|
|
|
863
|
|
|
|
1,764
|
|
Increase
(decrease) in accrued liabilities and other
|
|
|
1,013
|
|
|
|
374
|
|
Net
Cash Used in Operating Activities
|
|
|
(2,898
|
)
|
|
|
(2,729
|
)
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Sale (purchase)
of property and equipment
|
|
|
1,721
|
|
|
|
(192
|
)
|
Investment in water
assets
|
|
|
-
|
|
|
|
(691
|
)
|
Construction
in progress
|
|
|
(506
|
)
|
|
|
(2,597
|
)
|
Net
Cash Used in Investing Activities
|
|
|
1,215
|
|
|
|
(3,480
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
GrowCo LLC preferred
membership offerings
|
|
|
93
|
|
|
|
1,095
|
|
Proceeds from sale
of preferred membership units
|
|
|
252
|
|
|
|
-
|
|
Proceeds from warrant
exercises
|
|
|
306
|
|
|
|
456
|
|
Proceeds from debt
|
|
|
2,456
|
|
|
|
5,237
|
|
Payment
on notes payable
|
|
|
(1,560
|
)
|
|
|
(950
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
1,547
|
|
|
|
5,838
|
|
Net Increase in Cash
& Cash Equivalents
|
|
|
(136
|
)
|
|
|
(371
|
)
|
Beginning
Cash & Cash Equivalents
|
|
|
150
|
|
|
|
521
|
|
Ending
Cash & Cash Equivalents
|
|
$
|
14
|
|
|
$
|
150
|
|
Supplemental Disclosure
of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
621
|
|
|
$
|
1,460
|
|
Equipment purchases
financed
|
|
$
|
-
|
|
|
$
|
67
|
|
Equipment exchanged
for debt
|
|
$
|
287
|
|
|
$
|
-
|
|
Conversion of
debt, preferred shares into Two Rivers common stock
|
|
$
|
464
|
|
|
$
|
261
|
|
Land Exchanged
for debt
|
|
$
|
-
|
|
|
$
|
381
|
|
Conversion of
TR Cap into Two Rivers commmon shares
|
|
$
|
70
|
|
|
$
|
-
|
|
Conversion of
accounts payable into Water Redev convertible note
|
|
$
|
100
|
|
|
$
|
-
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2017 and 2016
(In
thousands)
|
|
Voting
Common Stock
|
|
|
WRC
Preferred
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Stock-holders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Interest
|
|
|
Equity
|
|
Balances,
December 31, 2015
|
|
|
26,981
|
|
|
$
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
73,702
|
|
|
$
|
(73,517
|
)
|
|
$
|
30,912
|
|
|
$
|
31,124
|
|
Net
Income (Loss) attributed to Two Rivers common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,727
|
)
|
|
|
-
|
|
|
|
(10,727
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
(200
|
)
|
TR
Cap 20151231 distribution - in-kind to TR Capital holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
495
|
|
|
|
495
|
|
Shares
issued for TR Capital conversions
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
-
|
|
Warrant
repricing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
Warrants
exersiced
|
|
|
649
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456
|
|
GrowCo
unvesting release
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
100
|
|
Debt
exchanged for shares of common stock
|
|
|
728
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
287
|
|
Two
Rivers warrants issued with GrowCo debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
Stock
Based Compensation
|
|
|
2,058
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
GCP
Super Units, LLC preferred membership offering
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,095
|
|
|
|
1,095
|
|
Balances,
December 31, 2016
|
|
|
30,452
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,142
|
|
|
|
(84,244
|
)
|
|
|
32,366
|
|
|
|
23,295
|
|
Continued
on next page
Continued
from previous page
|
|
Voting
Common Stock
|
|
|
WRC
Preferred
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Interest
|
|
|
Equity
|
|
Balances, December 31, 2016
|
|
|
30,452
|
|
|
$
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
75,142
|
|
|
$
|
(84,244
|
)
|
|
$
|
32,366
|
|
|
$
|
23,295
|
|
Net Income (Loss) attributed
to Two Rivers common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,924
|
)
|
|
|
-
|
|
|
|
(12,924
|
)
|
TR Cap Warrant Exchanges
|
|
|
1,417
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306
|
|
RSU Issuance
|
|
|
139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued for TR
Capital conversions
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
-
|
|
Stock Based Compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
796
|
|
Water Redevelopment
Company preferred offering
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
|
|
252
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
252
|
|
Stock issued in exchange
for debt settlement
|
|
|
665
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
465
|
|
Non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(637
|
)
|
|
|
(637
|
)
|
Shares issued for services
|
|
|
25
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151
|
|
Warrants issued for
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
331
|
|
GrowCo Shares issued
to directors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
GrowCo
SuperUnits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
93
|
|
Balances, December
31, 2017
|
|
|
32,750
|
|
|
$
|
34
|
|
|
|
65
|
|
|
$
|
252
|
|
|
$
|
77,267
|
|
|
$
|
(97,168
|
)
|
|
$
|
31,752
|
|
|
$
|
12,137
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2017 and 2016
NOTE
1 – ORGANIZATION AND BUSINESS
The
following is a summary of some of the information contained in this document. Unless the context requires otherwise, references
in this document to “Two Rivers,” or the “Company” is to Two Rivers Water & Farming Company and its
subsidiaries.
Corporate
Evolution
Prior
to 2009, the Company was named Navidec Financial Services, Inc. (“Navidec”) and had been engaged in mortgage lending
and other enterprises unrelated to its current lines of business. Navidec was incorporated in the state of Colorado on December
20, 2002. On July 28, 2009, Navidec formed a wholly-owned Colorado corporation for the purpose of acquiring farm and water assets
in the Colorado Huerfano/Cucharas watershed. On November 19, 2009, with shareholder approval, Navidec changed its name to Two
Rivers Water Company. On December 11, 2012, with shareholder approval, the Company changed its name to Two Rivers Water &
Farming Company.
On
January 29, 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional
operations. We formed a new company, TR Capital Partners, LLC or TR Capital, which issued all of its common units to Two Rivers
Water & Farming Capital. TR Capital then initiated the transactions described below under “Placement of Preferred Units”.
Following the completion of those transactions in September 2014, TR Capital and our other direct and indirect subsidiaries (excluding
HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company) entered into a series of related transactions as the result of which
assets and operations of such other subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates
all of the operations formerly conducted by those subsidiaries. The following chart shows a high-level view of our corporate organization
as of March 21, 2017. For a more detailed accounting of ownership structure please refer to exhibit 21.1 filed herewith.
The
above organizational charts shows GrowCo as a subsidiary of Two Rivers. Two Rivers owns 10,000,000 GrowCo common shares out of
approximately 35,000,000 GrowCo common shares outstanding. Ordinarily, this ownership percentage would not allow consolidation.
However, under Accounting Standards Codification 810-10-05 “Variable Entities” if there are material obligations between
the parent (Two Rivers) and the subsidiary (GrowCo) consolidation is required. Certain GrowCo investors have a secondary collateral
position in the Orlando/Butte Valley assets of Two Rivers. Two Rivers is viewed as the primary beneficiary since it holds the
majority of the variable interests.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of December 31,
2017, we own 6,538 gross acres. Gross acres owned decreased from 7,376 gross acres at December 31, 2016 due to the sale of 838
acres.
We
are focused on water assets we have acquired and will acquire in the future. 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. Our water asset area spans
over 1,900 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of
Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along
the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water
contained therein and serve the community while providing returns to our investors.
Since
October 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest.
We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest
strategically in the assets that will. Specifically, we are selling our irrigated farmland currently used for the production of
produce, the associated Dionisio produce business along with land that no longer serves our strategic vision of water management.
We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In
May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common
stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’
common shareholders based on four record dates (January 1, 2015; April 1, 2015; July 1, 2015, and October 1, 2015) after an effective
registration statement is filed, which has not yet occurred. Each record date will distribute 2,500,000 GrowCo common shares on
a prorata basis of shares owned of Two Rivers’ common shares.
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.
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
March 2016, GrowCo completed a $5.5 million private placement of equity interests of GCP Super Units, LLC, which will invest directly
in various assets of GCP1 and GCP2, with proceeds to be used to complete the construction of the first greenhouse, partially fund
the second greenhouse and provide working capital. The outside investment in GCP Super Units, LLC is reflected on our balance
sheet as a non-controlling equity interest.
GCP1’s
greenhouse was partially occupied in September, 2015 with lease revenue beginning September 1, 2015. On April 14, 2016, we received
notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that the then current tenant, Suncanna, LLC
(“Suncanna”), had received a suspension order. This suspension, in addition to non-payment of back due lease payments
owed, caused Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 began the eviction process against Suncanna.
Due to the eviction process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related
Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. During the
nine months ended September 30, 2016, we recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna
in early April 2016. The total write off of $1.330 million was partially offset by a $350,000 reduction in the amount owed to
the GCP1 preferred unit holders. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate GCP1’s greenhouse by September 6, 2016. On August 31, 2016, a lawsuit was filed by Aaron
Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against GrowCo, GrowCo Business Development, LLC.,
GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees, and associates. The Company believes
that the suit has no merit and will have no material impact on the Company’s financial condition.
Pending
the eviction of Suncanna, on August 4, 2016 GCP1 entered into a lease agreement with a related party Johnny Cannaseed, LLC, a
related party (“Johnny Cannaseed”) which is owned predominantly by our former CEO John McKowen who is the majority
shareholder in the Company. 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 receive 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, mostly equal, parts, referred to as
GCP1-1 and GCP1-2. As reported by Johnny Cannaseed, for the year ended December 31, 2017, the GCP1 tenant paid to Johnny
Cannaseed $620,000 which was paid to GCP1. The GCP1-2 tenant did not pay any rent and was subsequently evicted by Johnny Cannaseed.
Johnny Cannaseed is proceeding to collect back due rent from the GCP1-2 tenant. For the year ended December 31, 2017, the Company’s
consolidated income only recognizes the actual rent received of $620,000. Effective February 1, 2018, GCP1 released Johnny Cannaseed
from its lease. At that time, GCP1 signed a lease with the then current sub-lessee of GCP1-1.
GrowCo’s
second greenhouse project will also consist of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse
facility on an additional 40 acres of land. Upon completion, this project will be operated, as a landlord, by GrowCo Partners
2, LLC, or GCP2. GCP2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an unknown completion date. It is necessary to raise additional capital to complete GCP2.
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.
A
new $2M offering was subsequently initiated in March 2017 with substantially the same terms of prior GrowCo notes for the purposes
of supporting operations and finishing the second greenhouse. As of December 31, 2017, $1,520,000 was raised for this offering
along with an additional $386,000 under the $7 million exchange note.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company and TR
Capital and its subsidiaries, Two Rivers Farms, Two Rivers Water and GrowCo. All significant inter-company balances and transactions
have been eliminated in consolidation.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the balance sheet.
|
|
Year
ended December 31,
|
|
Entity
|
|
2017
|
|
|
2016
|
|
TR Capital
|
|
$
|
20,482,000
|
|
|
$
|
20,552,000
|
|
HCIC
|
|
|
1,388,000
|
|
|
|
1,381,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(850,000
|
)
|
|
|
(206,000
|
)
|
GrowCo Partners 1,
LLC
|
|
|
3,621,000
|
|
|
|
3,521,000
|
|
GCP Super Units, LLC
|
|
|
5,016,000
|
|
|
|
4,923,000
|
|
TR Cap 20150630 Distribution,
LLC
|
|
|
497,000
|
|
|
|
497,000
|
|
TR Cap 20150930 Distribution,
LLC
|
|
|
460,000
|
|
|
|
460,000
|
|
TR Cap 20151231 Distribution,
LLC
|
|
|
495,000
|
|
|
|
495,000
|
|
Totals
|
|
$
|
31,752,000
|
|
|
$
|
32,366,000
|
|
During
the year ended December 31, 2014, investors in Two Rivers Farms F-1 (convertible notes and preferred shares), Two Rivers Farms
F-2 (convertible notes and preferred shares), the Company’s preferred shares, ASF convertible notes, DFP preferred shares,
Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners,
LLC and were issued 30,159,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.
The
30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common
stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20,
Debt (and other convertible instruments with beneficial convertible features (“BCF”),
the Company determined
that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000
were recorded for the year ended December 31, 2014.
Two
Rivers also formed three LLC special entities (TR Cap 20150630, Distribution, TR Cap 20150930 Distribution and TR Cap 20151231)
to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership units.
Below
is the breakdown of the non-controlling interest share of gains (losses):
Entity
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
TR Capital
|
|
$
|
-
|
|
|
$
|
-
|
|
HCIC (1)
|
|
|
7,000
|
|
|
|
6,000
|
|
F-1 (2)
|
|
|
-
|
|
|
|
-
|
|
F-2 (2)
|
|
|
-
|
|
|
|
-
|
|
DFP (2)
|
|
|
-
|
|
|
|
-
|
|
GrowCo
|
|
|
(644,000
|
)
|
|
|
(206,000
|
)
|
GrowCo Partners 1,
LLC
|
|
|
-
|
|
|
|
-
|
|
GCP Super Units, LLC
|
|
|
-
|
|
|
|
-
|
|
TR Cap 20150630 Distribution,
LLC
|
|
|
-
|
|
|
|
-
|
|
TR Cap 20150930 Distribution,
LLC
|
|
|
-
|
|
|
|
-
|
|
TR Cap 20151231 Distribution,
LLC
|
|
|
-
|
|
|
|
-
|
|
Water
Redevelopment
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
(637,000
|
)
|
|
$
|
(200,000
|
)
|
|
Notes:
|
|
(1)
|
The
Company owns 95% of HCIC.
|
|
(2)
|
The
terms of the preferred shares in each subsidiary allows for a participatory additional preferred share dividend of 25% of
the profits derived from the assets held by the subsidiary. This participatory dividend, if any, will be recorded as a non-controlling
share of the income.
|
Reclassification
Certain
amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications
have been changed.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, Two Rivers Water & Farming Company considers cash and cash equivalents to include highly
liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant
risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term
nature of these financial instruments.
Concentration
of Credit Risk
Financial
instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, marketable
investments, advances and accounts receivable. The Company maintains its cash balances in the form of bank demand deposits, money
market accounts that management believes to be of high credit quality. Accounts receivable are typically uncollateralized and
are derived from transactions with and from customers primarily located in the United States.
Fair
Value of Measurements and Disclosures
Fair
Value of Assets and Liabilities Acquired
Fair
value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) in the
principal or most advantageous market in an orderly transaction between market participants. In determining fair value, the accounting
standards established a three-level hierarchy that distinguishes between (i) market data obtained or developed from independent
sources (i.e., observable data inputs) and (ii) a reporting entity’s own data and assumptions that market participants would
use in pricing an asset or liability (i.e., unobservable data inputs). Financial assets and financial liabilities measured and
reported at fair value are classified in one of the following categories, in order of priority of observability and objectivity
of pricing inputs:
●
Level 1 –
Fair value based on quoted prices in active markets for identical assets
or liabilities.
●
Level 2
– Fair value based on significant directly observable data (other than Level
1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally
be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical
or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
●
Level 3
– Fair value based on prices or valuation techniques that require significant
unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market
participants would use in pricing the asset or liability.
The
fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair
value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
Recurring
Fair Value Measurements
The
carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value.
The carrying value of cash held as demand deposits, money market and certificates of deposit, marketable investments, accounts
receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. Marketable investments
are valued at Level 1 due to readily available market quotes. The fair value of the Company’s long-term debt, including
the current portion approximated its carrying value. Fair value for long-term debt was estimated based on quoted market prices
of the identical debt instruments or values of comparable borrowings.
Accounts
Receivable, Related Party
The
Company carries its accounts receivable, net at management’s expectation of collection and past experience. As of December
31, 2017, and 2016, the Company did not have an allowance for doubtful accounts receivable based on past payment performance.
See Note 11 for transactions with this related party.
Capitalization
of Interest
As
of December 31, 2017, $897,000 in notes payable interest has been capitalized in the construction of greenhouse 1 and 2.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset which ranges from three to twenty-seven and a half years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the
related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged
to income.
Below
is a summary of premises and equipment:
|
|
|
|
|
December
31,
|
|
Asset
Type
|
|
Life
in Years
|
|
|
2017
|
|
|
2016
|
|
Office equipment, furniture,
computers
|
|
|
5
– 7
|
|
|
$
|
12,000
|
|
|
$
|
11,000
|
|
Computers
|
|
|
3
|
|
|
|
46,000
|
|
|
|
47,000
|
|
Vehicles
|
|
|
5
|
|
|
|
92,000
|
|
|
|
116,000
|
|
Farm equipment
|
|
|
7
- 10
|
|
|
|
244,000
|
|
|
|
1,632,000
|
|
Irrigation system
|
|
|
10
|
|
|
|
-
|
|
|
|
995,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
10,000
|
|
|
|
393,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
411,000
|
|
|
|
3,201,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(251,000
|
)
|
|
|
(1,842,000
|
)
|
Net book value
|
|
|
|
|
|
$
|
160,000
|
|
|
$
|
1,359,000
|
|
Land
Land
acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore,
additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added
to the cost of the land. Irrigation is not capitalized in the cost of Land (
Property and Equipment
above). Land is not
depreciated. However, once per year, Management will assess the value of land held, and in their opinion, if the land has become
impaired, Management will establish an allowance against the land.
Water
rights and infrastructure
Subsequent
to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and
if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. No amortization or
depreciation is taken on the water rights. See the discussion below concerning Impairments – Water rights and infrastructure.
Intangibles
Two
Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in HCIC and Orlando.
These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and
considerations, including, the historical upward valuation of water rights within Colorado.
Impairments
Property
and Equipment
Once
per year we review all property, equipment and software owned by the Company and compared the net book value of such assets with
the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net
book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value
of the affected asset will be recorded, and the impairment will not be reversed in future periods.
Land
Once
per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying
cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent
appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment
is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.
Water
rights and infrastructure
Once
per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable
water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value
is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment
will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not
be reversed in future periods.
Prior
to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For
the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis
caused the recognition of $6,900,000 impairment to the water infrastructure.
Impairment
of DFP Intangibles
In
2016, due to the discontinuance of DFP operations, we wrote off the full value of DFP intangibles (see Note 4).
Revenue
Recognition
Leasing
Greenhouse
The
lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainity
of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
Member
Assessments
Once
per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment
per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half
of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to
HCIC are eliminated in consolidation of the financial statements.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
Stock
Based Compensation
Beginning
January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC
718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period,
which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not
revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding
as of the effective date and are subsequently modified.
All
options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of
adoption.
Debt
and Equity
The
Company accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt,
and allocates proceeds received to the warrants based on relative fair values.
The
Company also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”),
which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or
in the money at inception because the conversion option has an effective strike price that is less than the market price of the
underlying stock at the commitment date. The Company would recognize the BCF by allocating the intrinsic value of the conversion
option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion
price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in
a discount on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
Income
Taxes
Provision
for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities
are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards. The change in deferred
tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in
enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period
of enactment.
The
Company uses a two-step process to evaluate a tax position. The first step is to determine whether it is more-likely-than-not
that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on
the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold
to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount
of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria
should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company
reports tax-related interest and penalties as a component of income tax expense.
Based
on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits
as of December 31, 2017, is not material to its results of operations, financial condition, or cash flows. The Company also believes
that the total amount of unrecognized tax benefits as of December 31, 2017, if recognized, would not have a material effect on
its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based
on current tax law and policy that the unrecognized tax benefits will significantly increase or decrease over the next 12 months
producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition
or cash flows.
The
amount of income taxes the Company pays is subject to ongoing examinations by federal and state tax authorities. To date, there
have been no reviews performed by federal or state tax authorities on any of the Company’s previously filed returns. The
Company’s 2013 and later tax returns are still subject to examination.
Net
Income (Loss) per Share
Basic
net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the
period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed
by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during
the period.
The
dilutive effect of the outstanding 118,000 RSUs, 3,847,500 options, and 16,469,328 warrants at December 31, 2017, has not been
included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.
Recently
Issued Accounting Pronouncements
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
“
Income Statement – Reporting Comprehensive Income (Topic 220)
”. This ASU deals with the reclassification
of certain tax effects from Accumulated Other Comprehensive Income. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
July 2017, FASB issued ASU “
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815)
”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to
the Company and the impact will be immaterial.
In
November 2016, the FASB issued ASU 2016-18, “
Statement of Cash Flows
”. The new guidance will require that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after
December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company plans to adopt
this new guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial
statements.
In
March 2016, the FASB issued ASU 2016-09, “
Improvements to Employee Share-Based Compensation Accounting
”, which
requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital, and treated as
an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election
to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur.
ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified
as a financing activity on the statement of cash flows. The ASU 2016-09 was subsequently updated with ASU 2017-09, issued in May
2017. These standards will become effective for us in fiscal 2018. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
February 2016, the FASB issued ASU 2016-02, “
Leases
”. The new standard establishes a right-of-use (ROU) model
that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition
in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018 which includes interim
periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized
in the Company’s financial statements. Due to the GrowCo leases, management believes that this ASU will have an impact on
its financials and is in the process of analyzing its impact.
In
November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
”, which requires
that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify
the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption
of this update to have a material impact on its financial statements.
In
August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09,
“
Revenue from Contracts with Customers
”, which amended revenue recognition guidance to clarify the principles
for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record the transfer
of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange
for those goods or services. Expanded additional disclosures are required relating to the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required
about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill
a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one
of two prescribed retrospective methods. Early adoption is not permitted. At this point, due to the Company having no revenue
contracts with customers, except for leasing agreements, Management believes that there will be no material impact on its financial
statements.
In
April 2015, FASB issued ASU 2015-03, “
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs”.
The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016. Early adoption is allowed for financial statements that have not been previously issued.
Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the
debt liability, similar to the presentation of debt discounts. The Company has elected to adopt this ASU early and is presented
in these financial statements.
In
July 2015, the FASB issued ASU 2015-11, “
Simplifying the Measurement of Inventory
”. Under this ASU, inventory
will be measured at the “lower of cost and net realizable value” and options that currently exist for “market
value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made
to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December
15, 2016. Early application is permitted and should be applied prospectively. Management has early adopted ASU 2015-11 and notes
no material impact on the Company’s financial position or results of operations.
In
August 2014, the FASB issued ASU No. 2014-15, “
Disclosure of Uncertainties About an Entity’s Ability to Continue
as a Going Concern
, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40
Presentation of Financial Statements – Going
Concern”
, by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties
in their financial statements, including requiring management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date of issuance of the entity’s financial statements and providing
certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15
will be effective after December 15, 2016, and early adoption is permitted.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
NOTE
3 – DISCONTINUED OPERATIONS
During
the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided
to sell all assets associated with this business due to the sustained losses incurred.
The
assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued
operations held for sale” and Liabilities of discontinued operations held for sale,” respectively, in the accompanying
Consolidated Balance Sheets at December 31, 2017 and December 31, 2016 consist of the following:
Assets of discontinued operations held for sale:
|
|
December
31, 2017
|
|
|
December
31, 2016
(as re-stated)
|
|
Cash
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Accounts receivable
|
|
|
-
|
|
|
|
37,000
|
|
Deposits and other
current assets
|
|
|
-
|
|
|
|
57,000
|
|
Land and equipment
|
|
|
-
|
|
|
|
2,685,000
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
2,785,000
|
|
Liabilities of discontinued operations
held for sale
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
777,000
|
|
Accrued liabilities
|
|
|
-
|
|
|
|
42,000
|
|
Notes payable
|
|
|
-
|
|
|
|
2,022,000
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
2,841,000
|
|
The
income from discontinued operations presented in the statements of operations consist of the following for the year ended December
31, 2017 and December 31, 2016:
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
3,774,000
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
(4,308,000
|
)
|
General and administrative expenses
|
|
|
(993,000
|
)
|
|
|
-
|
|
Depreciation and amortization
|
|
|
(1,000
|
)
|
|
|
(560,000
|
)
|
Interest
|
|
|
(43,000
|
)
|
|
|
(284,000
|
)
|
Other (gain (loss)
on disposal of assets and intangibles)
|
|
|
(8,000
|
)
|
|
|
(1,246,000
|
)
|
Total
|
|
$
|
(1,045,000
|
)
|
|
$
|
(2,624,000
|
)
|
On
March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds
fom the auction were $1,740,000 with net proceeds estimated to be $1,583,000. Proceeds were used to pay off secured debt first
with any residual proceeds used to pay unsecured debt.
NOTE
4 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon
purchasing land, the value is recorded at the purchase price or fair value, whichever is more accurate. Costs incurred to prepare
the land for the intended purpose, which is efficient irrigated farming, is also capitalized in the recorded cost of the land.
No amortization or depreciation is taken on Land. However, the land is reviewed by management at least once per year to ascertain
if a further analysis is necessary for any potential impairments.
Water
rights and infrastructure
The
Company has acquired both direct flow water rights and water storage rights. We have obtained water rights through the purchase
of shares in a mutual ditch company, which we did with our purchase of shares in HCIC, or through the purchase of an entity holding
water rights, which we did with our purchase of the Orlando. The Company may also acquire water rights through outright purchase.
In all cases, such rights are recognized under decrees of the Colorado water court and administered under the jurisdiction of
the Office of the State Engineer.
Upon
purchasing water rights, the value is recorded at our purchase price. If a majority interest is acquired in a company holding
water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines
the fair value of the assets. To assist with the valuation, the Company may consider reports from a third-party valuation firm.
If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized. If the value
of the water assets are less than what the Company paid then goodwill is recognized.
Subsequent
to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair
market value, the Company will establish an impairment allowance. Currently, there $6,930,000 in impairments on the Company’s
land and water rights. No amortization or depreciation is taken on the water rights.
Construction
in progress
During
the year ended December 31, 2016, the Company transferred, as a partial completion, $3,315,000 into the first greenhouse. The
Company has expended $8,922,000 on greenhouses 1 and 2. Management’s current plan is to complete greenhouse 2 to be 90,000
square feet with an associated 15,000 square foot warehouse.
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
3,520,000
|
|
|
$
|
4,684,000
|
|
Additions
|
|
|
506,000
|
|
|
|
2,495,000
|
|
Finished - Transferred
|
|
|
(665,000
|
)
|
|
|
(3,659,000
|
)
|
Ending Balance
|
|
$
|
3,361,000
|
|
|
$
|
3,520,000
|
|
NOTE
5 – NOTES PAYABLE
HCIC
Seller Carry Back Notes
Beginning
on September 17, 2009, Two Rivers began acquiring shares in HCIC and related land from a HCIC shareholder. As part of these acquisitions,
many of the sellers financed notes payable with Two Rivers and HCIC. As of December 31, 2012, these loans totaled $7,364,000.
The notes carry interest at 6% per annum, interest payable monthly, the principal amounts were due at various dates from March
31, 2013 through September 30, 2016, and are collateralized by HCIC share.
In
June 2013, the Company negotiated an extension on holders representing $6,164,000 of the seller carry back notes. Previously these
amounts were due either August or September 2013. The holders of the notes agreed to extend the due date to June 30, 2016. In
exchange for this extension, the Company increased the principal balance by 20% from $6,164,000 to $7,397,000, paid 5.43% against
the principal and agreed to begin paying monthly interest and principal at a 20-year amortization rate.
In
May 2016, the Company negotiated another extension on holders representing $5,214,000 to extend the due date from June 30, 2016
to June 30, 2019. The extension reset the amortization period to 12 years, kept interest at 6% per year, and called for a 5% principal
reduction in February, 2017. Payments to all of the HCIC note holders are behind. The Company is in technical default on $6,371,000
of the HCIC carry back notes due to non-payment of interest and principle. Consequently, the entire amount of the notes has been
classified as current.
For
the year ended December 31, 2017, holders representing $3,181,000 of the notes held conversion rights into the Company’s
common shares at $1.00 to $1.25. These conversions were cancelled and replaced by 5-year warrants at $3.00 per share. A total
of 1,367,000 warrants were issued. The warrants issued had a fair value of $277,000 using the Black Scholes method of fair value
determination.
Colorado
Water Conservation Loan (“CWCB”)
On
March 5, 2012, the Company closed long-term financing with the Colorado Department of Natural Resources, Colorado Water Conservation
Board in the amount of $1,185,000 (the “CWCB Loan”). This loan partially financed the rehabilitation of the Cucharas
Reservoir to temporarily bring it into safety compliance with the Colorado State Engineers office. Further, the CWCB Loan assisted
with the rehabilitation of the Orlando facilities through the installation of a new outlet gate/pipe. There was a $12,000 service
fee due upon closing. This amount is being amortized over the expected life of the CWCB Loan, which is 20 years with interest
fixed at 2.5% per annum. During the year ended December 31, 2016, the Company paid an additional $210,000 toward the CWCB Loan
principal in order to release CWCB’s lien on 157 acres being used to build GrowCo greenhouses. As of December 31, 2017,
and 2016, the amounts outstanding under the CWCB Loan totaled $748,000 and $798,000, respectively.
FirstOak
Bank – Dionisio Purchase
The
Company purchased Dionisio assets in 2012. The cost of the Dionisio land/water acquisition was $1,500,000, of which $900,000 was
financed by FirstOak Bank and $600,000 was paid in cash.
The
terms of the FirstOak loan is at 1% above the base rate on corporate loans posted by at least 75% of the nation’s 30 largest
banks known as the Wall Street Journal Prime Rate (3.50% as of December 31, 2016 and 3.25% as of December 31, 2015), subject to
a minimum of 6% per annum. The FirstOak loan is secured by the Dionisio assets, which include 146 shares of the Bessemer Irrigation
Ditch Company (“BIDC”). There are five annual payments of $76,000 due each December 15 commencing December 15, 2012.
A balloon payment of all accrued interest and outstanding principal was due June 15, 2017. As of December 31, 2016 the amounts
outstanding under the FirstOak loan totaled $771,000. In March, 2017 this debt was settled through the liquidation of Dionisio
Farms and Produce (“DFP”).
In
May 2014, the Company also borrowed $176,000 to purchase additional farmland. The loan is at 1.5% above the base rate on corporate
loans posted by at least 75% of the nation’s 30 largest banks known as the Wall Street Journal Prime Rate, subject to a
minimum of 6% per annum. The FirstOak loan is secured by 9 BIDC shares, well permits and water leases. There are five annual payments
of $15,000 due each December 15 commencing December 15, 2014. A balloon payment of all accrued interest and outstanding principal
was due December 5, 2018 of $160,000. As of December 31, 2016 the amounts outstanding under the FirstOak loan totaled $118,000,
respectively. In March, 2017 this debt was settled through the liquidation of DFP.
Seller
Carry Back – Dionisio
On
November 2, 2012, the Company acquired the Dionisio produce business and related equipment for $1,500,000. The seller carried
back $600,000 (which was subsequently reduced to $590,000 due to the Company assuming additional debt owed by seller) of this
purchase price. The note is paid quarterly, interest only at 6% per annum. The note is due November 2, 2017. Certain assets of
Dionisio secure the note. In March, 2017 this debt was settled through the liquidation of DFP.
FirstOak
Bank – Mater Purchase
The
cost of the Mater land/water acquisition was $325,000, of which $169,000 was financed by FirstOak, $25,000 seller carry back and
$131,000 was paid in cash. The purchase price has been allocated to land for $106,000 and $219,000 to water rights representing
the purchase of BIDC shares.
The
terms of the First Oak loan is at 1% above the base rate on corporate loans posted by at least 75% of the nation’s 30 largest
banks known as the Wall Street Journal Prime Rate, subject to a minimum of 6% per annum. The FirstOak loan is secured by the Mater
assets. There are four annual payments of $15,000 due each December 5 commencing December 15, 2013. A balloon payment of all accrued
interest and outstanding principal is due December 5, 2017 for $159,000.
As
of December 31, 2016, the amounts outstanding under the FirstOak loan totaled $156,000. In March, 2017 this debt was settled through
the liquidation of DFP.
McFinney
Agri-Finance LLC (McFinney) and Ellicot second mortgage (Ellicot)
On
March 15, 2013, the Company purchased unimproved land in El Paso county, Colorado for a purchase price of $1,250,000. The company
paid $620,000 (including closing costs and allocations) and financed $650,000 McFinney and $400,000 Ellicot, through private investors.
The
terms of the McFinney financing is for monthly payments of principal and interest of $4,238 per month, a fixed interest rate of
6.8% per annum, with the remaining principal due on April 1, 2018. The note is secured by a deed of trust on the 2,579 acres of
land purchased and a guaranty of payment by the Company. The Company has been in contact with the lender and has reached a verbal
agreement to extend the loan another 12 months. However, since the agreement is not in writing, the Company has classified this
debt as current.
As
of December 31, 2017 and 2016, the amounts outstanding under the McFinney loan totaled $441,000 and $625,000, respectively. The
paydown of principal occurred through land sales secured by the loan and the payment of 75% of the land sale proceeds to pay down
the principal in return for parital land releases from the bank.
GrowCo
$4M Notes
During
the ended December 31, 2015, the Company, through its subsidiary GrowCo, issued $4,000,000 in promissory notes to 17 individual
investors. The notes have a security interest in the land, water and improvements to the 157 acres where GrowCo Partners 1 and
GrowCo Partners 2 are developing the greenhouses. The notes pay 22.5% in annual interest, with interested paid monthly, and are
due April 1, 2020. The Company cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary,
or thereafter, of each note with a 60-day notice to the Company. Due to this call provision, the net amount of the GrowCo note
balance of $4,000,000 is presented as a current portion of long term debt on the financials.
The
GrowCo notes investors also received one GrowCo common stock $1 warrant for each $1 invested. These warrants expire on April 30,
2020.
On
January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on
payments by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint
is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
GrowCo
Exchange Notes
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding
as of December 31, 2017.
During
the year ended December 31, 2017, GrowCo raised an additional $1,906,000 under the GrowCo Exchange Notes offering.
During
the year ended December 31, 2017, the Company incurred $302,000 in debt issuance costs related to its GrowCo Exchange Notes offering.
The debt issuance costs are being amortized via the effective interest method, using 22.5%, over the life of the notes.
Hemp
Crop Participation Loan
For
the twelve months ended December 31, 2016, DFP issued short term notes, due March 31, 2017, to assist with the payment of crop
inputs. These notes are secured by the Company’s live agriculture products planted during the 2016 calendar year. On August
10, 2016, Wayne Harding, our Chief Executive Officer, invested $7,000 in the DFP Hemp Crop Participation Loan (see Note 11). These
notes were paid in full in 2017.
El
Paso Land Loan
In
August, 2017, the Company borrowed $275,000 pledging a second lien on property the Company owns in El Paso County Colorado. This
loan pays 18%/annum interest and is to be repaid through the sale of 35 to 40 acre lots. The repayment is based on 25% of the
net proceeds from sales. The stated maturity date is August 1, 2019.
WRC
Convertible Note
For
the year ended December 31, 2017, Water Redevelopment Company (WRC) issued convertible notes which are due note April 1, 2020.
It carries interest at 12% per annum and is secured by a security interest in the water supply agreement between the Company and
a real estate developer in the area of the Orlando/Butte Valley facilities. This note, at the option of the holder, can be converted
into one share of WRC preferred shares for each $4.23 of principal balance and accrued interest. At December 31, 2017, the balance
was $300,000.
OID
Black Mountain Note
This
note was entered into on April 26, 2017. It is an orginal issuance discount note with the face principal amount of $330,000 and
gross cash paid at closing of $300,000. It was due on October 26, 2017, but has been extended to now being due on April 1, 2018.
Below
is a summary of the Company’s long term debt:
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Dec
31, 2016 Principal Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC seller
carry back
|
|
$
|
6,301,000
|
|
|
$
|
296,000
|
|
|
$
|
-
|
|
|
$
|
6,645,000
|
|
|
|
6
|
%
|
|
Shares in
the Mutual Ditch Company
|
CWCB
|
|
|
748,000
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
798,000
|
|
|
|
2.5
|
%
|
|
Certain Orlando and
Farmland assets
|
FirstOak Bank - Dionisio
Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
771,000
|
|
|
|
(1
|
)
|
|
Dionisio farmland and
146.4 shares of Bessemer Irrigating Ditch Company Stock, well permits
|
FirstOak Bank - Dionisio
Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,000
|
|
|
|
(2
|
)
|
|
Dionisio farmland and
9 shares of Bessemer Irrigating Ditch Company Stock, well permits, water leases
|
Seller Carry Back -
Dionisio
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
590,000
|
|
|
|
6.0
|
%
|
|
Unsecured
|
FirstOak Bank - Mater
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156,000
|
|
|
|
(1
|
)
|
|
Secured by Mater assets
purchased
|
McFinney Agri-Finance
|
|
|
441,000
|
|
|
|
-
|
|
|
|
|
|
|
|
625,000
|
|
|
|
6.8
|
%
|
|
2,579 acres of pasture
land in Ellicott Colorado
|
GrowCo $4M notes
|
|
|
4,000,000
|
|
|
|
531,000
|
|
|
|
(62,000
|
)
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various land and water
assets
|
GrowCo $1.5M exchange
note
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various land and water
assets
|
GrowCo $6M exchange
note
|
|
|
1,855,000
|
|
|
|
288,000
|
|
|
|
(76,000
|
)
|
|
|
2,010,000
|
|
|
|
22.5
|
%
|
|
Various land and water
assets
|
GrowCo $7M exchange
note
|
|
|
3,132,000
|
|
|
|
351,000
|
|
|
|
(143,000
|
)
|
|
|
2,677,000
|
|
|
|
10-22.5
|
%
|
|
Various land and water
assets
|
GrowCo $2M exchange
note
|
|
|
1,520,000
|
|
|
|
238,000
|
|
|
|
(94,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Various land and water
assets
|
Hemp loan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71,000
|
|
|
|
18.0
|
%
|
|
Crop Lien
|
GCP1 Short Term
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
22.5
|
%
|
|
None
|
Bridge loan Harding
|
|
|
13,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18.0
|
%
|
|
None
|
El Paso land
|
|
|
275,000
|
|
|
|
19,000
|
|
|
|
(21,000
|
)
|
|
|
-
|
|
|
|
18.0
|
%
|
|
Second on El Paso County
land
|
WRC convertible
|
|
|
300,000
|
|
|
|
26,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12.0
|
%
|
|
Lien on water supply
agreement
|
Equipment loans
|
|
|
122,000
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
5
- 8
|
%
|
|
Various equipment
|
OID
Black Mountain
|
|
|
300,000
|
|
|
|
-
|
|
|
|
(54,000
|
)
|
|
|
-
|
|
|
|
|
|
|
None
|
Total
|
|
|
19,107,000
|
|
|
$
|
1,758,000
|
|
|
$
|
(450,000
|
)
|
|
|
18,886,000
|
|
|
|
|
|
|
|
Less: Note discounts
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
Less:
Current portion net of discount
|
|
|
(17,419,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,590,000
|
)
|
|
|
|
|
|
|
Long
term portion net of discount
|
|
$
|
1,238,000
|
|
|
|
|
|
|
|
|
|
|
$
|
5,766,000
|
|
|
|
|
|
|
|
|
(1)
Prime rate + 1%, but not less than 6%
|
|
(2)
Prime rate + 1.5%, but not less than 6%
|
Current portion long
term debt:
|
|
December
31, 2017
|
|
HCIC seller carry back
|
|
$
|
6,301,000
|
|
CWCB
|
|
|
70,000
|
|
McFinney Agri-Finance
|
|
|
441,000
|
|
GrowCo $4M note
|
|
|
4,000,000
|
|
GrowCo $1.5M exchange note
|
|
|
100,000
|
|
GrowCo $6M exchange note
|
|
|
1,855,000
|
|
GrowCo $7M exchange note
|
|
|
3,132,000
|
|
GrowCo $2M exchange note
|
|
|
1,520,000
|
|
Bridge loan Harding
|
|
|
13,000
|
|
TURV Long Term NP
|
|
|
100,000
|
|
Equipment loans
|
|
|
37,000
|
|
OID Black Mountain
|
|
|
300,000
|
|
Total
|
|
|
17,869,000
|
|
Less discount
|
|
|
(450,000
|
)
|
|
|
$
|
17,419,000
|
|
Schedule
of principal payment due by year:
Year
Ending December 31,
|
|
Total
|
|
2018
|
|
$
|
17,869,000
|
|
2019
|
|
|
275,000
|
|
2020
|
|
|
410,000
|
|
2021
|
|
|
71,000
|
|
2022 &
Beyond
|
|
|
482,000
|
|
Total
|
|
$
|
19,107,000
|
|
NOTE
6 – INFORMATION ON BUSINESS SEGMENTS
We
organize our business segments based on the nature of the products and services offered. We focus on the Water and Greenhouse
business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of
businesses: Greenhouse and Water. Greenhouse contains our leasing of state of the art greenhouses to cannabis growers. Water contains
our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations
may differ from those on the face of the income statement. The Farming Business has been discontinued and therefore the operating
losses and assets have been summarized.
In
the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate,
to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments,
and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating
results for each of the segments of the Company are as follows (in thousands):
|
|
Twelve
Months Ended December 31, 2017
|
|
|
Twelve
Months Ended December 31, 2016
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
620
|
|
|
$
|
72
|
|
|
$
|
692
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
$
|
68
|
|
|
$
|
272
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
-
|
|
|
|
-
|
|
|
|
620
|
|
|
|
39
|
|
|
|
659
|
|
|
|
-
|
|
|
|
-
|
|
|
|
204
|
|
|
|
68
|
|
|
|
272
|
|
Total Operating Expenses
|
|
|
(752
|
)
|
|
|
-
|
|
|
|
(501
|
)
|
|
|
(8,145
|
)
|
|
|
(9,398
|
)
|
|
|
(1,208
|
)
|
|
|
-
|
|
|
|
(2,457
|
)
|
|
|
(212
|
)
|
|
|
(3,877
|
)
|
Total
Other Income (Expense)
|
|
|
(530
|
)
|
|
|
-
|
|
|
|
(2,016
|
)
|
|
|
(368
|
)
|
|
|
(2,914
|
)
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(1,463
|
)
|
|
|
(603
|
)
|
|
|
(2,090
|
)
|
Net (Loss) from Operations
Before Income Taxes
|
|
|
(1,282
|
)
|
|
|
-
|
|
|
|
(1,897
|
)
|
|
|
(8,474
|
)
|
|
|
(11,653
|
)
|
|
|
(1,232
|
)
|
|
|
-
|
|
|
|
(3,716
|
)
|
|
|
(747
|
)
|
|
|
(5,695
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (Loss) from Operations
|
|
|
(1,282
|
)
|
|
|
-
|
|
|
|
(1,897
|
)
|
|
|
(8,474
|
)
|
|
|
(11,653
|
)
|
|
|
(1,232
|
)
|
|
|
-
|
|
|
|
(3,716
|
)
|
|
|
(747
|
)
|
|
|
(5,695
|
)
|
Net (Loss) from Discontinued
Operations
|
|
|
-
|
|
|
|
(1,045
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,045
|
)
|
|
|
-
|
|
|
|
(2,624
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,624
|
)
|
Preferred dividends
|
|
|
(369
|
)
|
|
|
-
|
|
|
|
(478
|
)
|
|
|
(16
|
)
|
|
|
(863
|
)
|
|
|
(1,937
|
)
|
|
|
-
|
|
|
|
(671
|
)
|
|
|
-
|
|
|
|
(2,608
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
644
|
|
|
|
(7
|
)
|
|
|
637
|
|
|
|
-
|
|
|
|
-
|
|
|
|
206
|
|
|
|
(6
|
)
|
|
|
200
|
|
Net
(Loss)
|
|
$
|
(1,651
|
)
|
|
$
|
(1,045
|
)
|
|
$
|
(1,731
|
)
|
|
$
|
(8,497
|
)
|
|
$
|
(12,924
|
)
|
|
$
|
(3,169
|
)
|
|
$
|
(2,624
|
)
|
|
$
|
(4,181
|
)
|
|
$
|
(753
|
)
|
|
$
|
(10,727
|
)
|
Segment
Assets
|
|
$
|
766
|
|
|
$
|
-
|
|
|
$
|
9,433
|
|
|
$
|
27,953
|
|
|
$
|
38,152
|
|
|
$
|
726
|
|
|
$
|
2,785
|
|
|
$
|
9,179
|
|
|
$
|
35,077
|
|
|
$
|
47,767
|
|
NOTE
7 - EQUITY TRANSACTIONS
Common
Stock
The
Company has authorized 100,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of December
31, 2017, was 32,749,920 common shares.
During
the year ended December 31, 2017, Two Rivers had the following common stock transactions:
|
●
|
issued
1,417,000 shares for early warrant exercises;
|
|
●
|
issued
52,260 shares for conversions by TR Capital preferred units;
|
|
●
|
issued
25,200 shares for investor relations services;
|
|
●
|
issued
139,000 from an RSU exercise, and
|
|
●
|
issued
665,000 shares in exchange for debt.
|
During
the year ended December 31, 2016, Two Rivers had the following common stock transactions:
|
●
|
issued
1,880,948 shares to its former CEO for RSU’s previously awarded;
|
|
●
|
returned
35,000 from a former independent board member;
|
|
●
|
issued
127,500 shares to its independent board members for 2015 service;
|
|
●
|
issued
85,000 shares to a former director for RSU’s previously awarded;
|
|
●
|
issued
727,500 shares to an HCIC debt holders in return for reduction in debt;
|
|
●
|
issued
649,700 shares for warrant exercises, and
|
|
●
|
issued
35,616 shares to holders of TR Capital for conversion into the Company’s shares.
|
Stock
Incentive Plans
The
Company previously had a 2005 Stock Option Plan (“2005 Plan”) that was superseded by the Two Rivers 2011 Long-Term
Stock Incentive Plan (“2011 Plan”). Upon the Company’s shareholder adoption of the 2011 Plan, the 2005 Plan
stopped issuance of any further grants, except for grants previously committed by agreement.
Under
the 2005 Plan, we have the following stock options issued and outstanding:
Company Relationship
|
|
Options
|
|
|
Date
of Grant
|
|
|
Vesting
Date
|
|
Performance
Requirement
|
|
Expiration
Date
|
|
Exercise
Price
|
|
|
Exercised
to Date
|
|
Consultant
|
|
|
600,000
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
$
|
0.70
|
|
|
|
-
|
|
There
were no options issued under the 2005 Plan for the years ending December 31, 2017 and 2016.
A
summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding December 21, 2015
|
|
|
1,989,867
|
|
|
$
|
1.25
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
1,989,867
|
|
|
|
1.25
|
|
Granted (1)
|
|
|
600,000
|
|
|
|
0.70
|
|
Cancelled (1)
|
|
|
(600,000
|
)
|
|
|
1.25
|
|
Expired
|
|
|
(1,389,867
|
)
|
|
|
1.25
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
600,000
|
|
|
$
|
0.70
|
|
Options Exercisable, December 31,
2017
|
|
|
600,000
|
|
|
$
|
0.70
|
|
Note
1: 600,000 options were extended and repriced from $1.25/share to $0.70/share
For
the year ended December 31, 2017, the Company extended 600,000 options that were due to expire in 2016 and 2017 to an expiration
dates in 2018 and 2019. This extension resulted in $52,000 of expense being recorded in 2017.
For
the yeard ended December 31, 2017, the Company extended the same 600,000 options and reset the strike price from $1.25/share to
$0.70/share and extended the expiration to occur in 2021 and 2022. This extension resulted in $85,000 of expense being recorded
in 2017.
Under
the 2011 Plan, we have the following stock options issued and outstanding:
Company Relationship
|
|
Options
|
|
|
Date
of Grant
|
|
|
Vesting
Date
|
|
Performance
Requirement
|
|
Expiration
Date
|
|
Exercise
Price
|
|
|
Exercised
to Date
|
|
CEO
|
|
|
825,000
|
|
|
|
Various
|
|
|
Various
|
|
Ongoing
|
|
2026-2017
|
|
|
Variable
|
|
|
|
-
|
|
Directors
|
|
|
1,380,000
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
$
|
0.53
|
|
|
|
-
|
|
Employees
|
|
|
806,500
|
|
|
|
Various
|
|
|
Various
|
|
Ongoing
|
|
Jun-’26
|
|
$
|
0.53
|
|
|
|
-
|
|
Others
|
|
|
236,000
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
|
Variable
|
|
|
|
-
|
|
Total
|
|
|
3,247,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Valuation Process
The
fair value of each option award is estimated on the date of grant. To calculate the fair value of options, the Company uses the
Black-Scholes model employing the following variables:
|
|
2017
|
|
|
2016
|
|
Expected stock price volatility
|
|
|
224
|
%
|
|
|
142
|
%
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
0.83
|
%
|
Expected option life (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Expected annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company arrived at the foregoing estimate of volatility of the Company’s common stock based on the Company’s stock
closing price on a weekly basis and averaged over the prior five years. The risk-free rate for periods within the expected term
of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The Company believes these estimates
and assumptions are reasonable. However, these estimates and assumptions may change in the future based on actual experience as
well as market conditions.
A
summary of the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”) is as follows:
|
|
Shares
|
|
Outstanding December 31, 2015
|
|
|
2,445,448
|
|
Granted
|
|
|
1,872,000
|
|
Cancelled
|
|
|
(72,000
|
)
|
Expired
|
|
|
-
|
|
Issued/Exercised
|
|
|
-
|
|
Outstanding December 31, 2016
|
|
|
4,173,448
|
|
Granted
|
|
|
1,211,500
|
|
Cancelled
|
|
|
(1,993,948
|
)
|
Expired
|
|
|
(25,000
|
)
|
Issued/Exercised
|
|
|
(118,500
|
)
|
Outstanding December 31, 2017
|
|
|
3,247,500
|
|
Exercisable, December 31, 2017
|
|
|
1,446,643
|
|
The
option expense from both the 2011 and 2005 Plans were $534,000 and $180,000 for the years ended December 31, 2017 and 2016, respectively.
Under
the 2011 Plan, we have issued the following Restricted Stock Units (RSUs):
Grantee
|
|
Company
Relationship
|
|
RSUs
issued
|
|
|
Date
of Grant
|
|
|
Vesting
Date
|
|
Performance
Requirement
|
|
Exercised
to Date
|
|
Jolee Henry
|
|
Prior Director
|
|
|
400,000
|
|
|
|
Oct-10
|
|
|
Jan-11
|
|
n/a
|
|
|
282,000
|
|
The
Company can issue stock awards and options for nonemployee services. If stock is granted, the Company values the stock using an
average of the closing price of the Company’s stock over the period that the service was rendered. If options are granted,
the Company uses the Black-Scholes model for determining fair value (see above).
Warrants
As
of December 31, 2017, the Company has outstanding the following warrants to purchase common stock:
Grantee
|
|
Company
Relationship
|
|
Shares
|
|
|
Date
of Grant
|
|
|
Vesting
Date
|
|
Expiration
Date
|
|
|
Exercise
Price
|
|
Investor Group
|
|
Investors
|
|
|
300,000
|
|
|
|
Feb-12
|
|
|
Mar-12
|
|
|
(1
|
)
|
|
$
|
1.00
|
|
HCIC Note Holders
|
|
Creditors
|
|
|
473,750
|
|
|
|
Jun-13
|
|
|
Jun-13
|
|
|
Jun-18
|
|
|
$
|
3.00
|
|
TR Capital Partners, LLC
|
|
Investors
|
|
|
14,168,944
|
|
|
|
Jul-05
|
|
|
Jul-05
|
|
|
Jan-19
|
|
|
$
|
2.10
|
|
GrowCo Exchange Note
|
|
Creditors
|
|
|
700,000
|
|
|
|
Apr-16
|
|
|
Apr-16
|
|
|
May-21
|
|
|
$
|
0.50
|
|
Two Rivers
|
|
Financial Advisor
|
|
|
15,000
|
|
|
|
Apr-17
|
|
|
Apr-17
|
|
|
Apr-22
|
|
|
$
|
0.58
|
|
Black Mountain Equity
|
|
Creditor
|
|
|
390,634
|
|
|
|
Apr-17
|
|
|
Apr-17
|
|
|
Apr-22
|
|
|
$
|
0.27
|
|
El Paso land creditors
|
|
Creditors
|
|
|
275,000
|
|
|
|
Aug-17
|
|
|
Aug-17
|
|
|
Aug-22
|
|
|
$
|
0.35
|
|
Black Mountain
Equity
|
|
Creditors
|
|
|
146,000
|
|
|
|
Sep-17
|
|
|
Sep-17
|
|
|
Sep-22
|
|
|
$
|
1.00
|
|
|
|
|
|
|
16,469,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
warrants are priced at the same price per share as the expected equity offering and expire one year after the completion of
the expected equity offering.
|
For
the years ended December 31, 2017 and 2016, warrant expense totaled $92,000 and $327,000, respectively.
TR
Capital Preferred Membership Units
The
30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common
stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20,
Debt (and other convertible instruments with beneficial convertible features (“BCF”),
the Company determined
that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000
were recorded for the year ended December 31, 2014. On the balance sheet as of December 31, 2014, these amounts were recorded
as retained earnings and as additional paid in capital, respectively, and are representative of preferred share dividends available
to non-controlling interest holders in the entity.
NOTE
8 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740, Income Taxes (formerly Statement of Financial Accounting Standard
No., 109, Accounting for Income Taxes). Under the provisions of ASC 740, a deferred tax asset or liability (net of a valuation
allowance) is provided in the financial statements by applying the provisions of applicable laws to measure the deferred tax consequences
of temporary differences that will result in taxable or deductible amounts in future years as a result of events recognized in
the financial statements in the current or proceeding years.
The
items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes
consists of the following:
Effective tax rate
|
|
|
|
|
Federal
statutory rate
|
|
|
34.00
|
%
|
Effect of:
|
|
|
|
|
State taxes, net
of federal benefit
|
|
|
3.06
|
%
|
Permanent items
|
|
|
-3.91
|
%
|
Return to Provision
Adjustment
|
|
|
5.65
|
%
|
Other Adjustment
|
|
|
-
|
%
|
Valuation allowance
|
|
|
-38.80
|
%
|
Effective income
tax rate
|
|
|
0.00
|
%
|
Book
loss reconciliation to estimated taxable income is as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Book loss
|
|
$
|
(12,924
|
)
|
|
$
|
(10,933
|
)
|
Tax adjustments:
|
|
|
|
|
|
|
|
|
Stock Based Comp
|
|
$
|
956
|
|
|
$
|
61
|
|
Stock Comp Exercised
|
|
$
|
-
|
|
|
$
|
(33
|
)
|
Impairments
|
|
$
|
6,900
|
|
|
$
|
-
|
|
Capital Expenses
|
|
$
|
1,032
|
|
|
$
|
2,629
|
|
Meals & Entertainment
|
|
$
|
-
|
|
|
$
|
6
|
|
Warrant Expense
|
|
$
|
331
|
|
|
$
|
327
|
|
Political Contributions
|
|
$
|
-
|
|
|
$
|
16
|
|
Gain / Loss on Disposal
|
|
$
|
(89
|
)
|
|
$
|
-
|
|
Depreciation
|
|
$
|
(617
|
)
|
|
$
|
514
|
|
Amortization
|
|
$
|
(14
|
)
|
|
$
|
834
|
|
Estimate of taxable
income
|
|
$
|
(4,425
|
)
|
|
$
|
(6,579
|
)
|
Income
tax provision is summarized below (in thousands):
|
|
2017
|
|
|
2016
|
|
Current expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4,600
|
)
|
|
|
(2,382
|
)
|
State
|
|
|
(414
|
)
|
|
|
(214
|
)
|
Total deferred
|
|
|
(5,014
|
)
|
|
|
(2,596
|
)
|
Less: Valuation
allowance
|
|
|
5,014
|
|
|
|
2,596
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
We
will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. At
December 31, 2017 we had no unrecognized tax benefits in income tax expense, and do not expect any in 2018. Our income tax returns
are no longer subject to Federal tax examinations by tax authorities for years before 2014 and state examinations for years before
2014.
The
components of the deferred tax asset are as follows (in thousands):
Current deferred tax
asset:
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforwards
|
|
$
|
(18,309
|
)
|
|
$
|
(16,319
|
)
|
Capital loss
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Bargain purchase
|
|
|
643
|
|
|
|
643
|
|
RSU & stock option expense
|
|
|
(2,349
|
)
|
|
|
(1,995
|
)
|
Fixed Assets and Intangibles
|
|
|
(327
|
)
|
|
|
(214
|
)
|
Charitable Contributions
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Bad Debt
|
|
|
-
|
|
|
|
-
|
|
Total cumulative deferred tax assets
|
|
|
(18,339
|
)
|
|
|
(17,899
|
)
|
Valuation allowance
|
|
|
18,339
|
|
|
|
17,899
|
|
Effective income
tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2017 and December 31, 2016, the deferred tax asset of $18,384,000 and $17,889,000, respectively,
has a valuation allowance of $18,384,000 and $17,899,000, respectively, since management has determined the tax benefit cannot
be reasonably assured of being used in the near future. The net operating loss carryforward, if not used, will begin to expire
in 2029, and is severely restricted as per the Internal Revenue Code if there is a change in ownership. The following is a summary
of the combined net operating loss carryforward (in thousands):
|
|
Federal
|
|
|
Colorado
|
|
12/31/16
|
|
$
|
44,035
|
|
|
$
|
44,035
|
|
12/31/17
|
|
|
4,425
|
|
|
|
4,425
|
|
Balance
|
|
$
|
48,460
|
|
|
$
|
49,460
|
|
NOTE
9 – IMMATERIAL ERROR CORRECTIONS
This
10-K of the Company for the twelve months ended December 31, 2017, includes the restatement of the Company’s previously
filed consolidated balance sheets for the fiscal year ended December 31, 2016.
The
Company’s management has concluded that in the Assets section of the Balance Sheet, Long Term Assets for Land and Water,
and under Liabilities the Liabilities for Discontinued Operations and Notes Payable, net of current portion were misstated and
that for comparative purposes in 2017 filings these figures should be re-stated but that the adjustments are not material modifications.
Accordingly, the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial
with respect to the prior year financial statements. Furthermore, the Company has determined that correcting prior year financial
statements for immaterial changes would not require previously filed reports to be amended.
Under
Long Term Assets, while the Assets of Discontinued Operations Held for Sale as well as Total Assets were stated correctly, due
to a mis-classification of which assets were being held for sale, Land was understated by $952,000 and Water was overstated by
the same amount. Discontinued Operations - Notes Payable was overstated by $798,000, while Notes Payable, net of current portion
was understated by the same amount due to a loan that was improperly classified as a Liability of Discontinued Operations Held
for Sale. While total assets of discontinued operations held for sale was correctly stated, under Long Term Assets, Land was understated
by $952,000 and Water Assets was overstated by the same amount. Neither Net Income or Shareholders Equity were affected by these
mis-statements. The effect of these restatements on the Company’s 2016 full year balance sheet as reported on the Form 10-K
reports, are as follows:
|
|
December
31, 2016 Previously Reported
|
|
|
Net
Change
|
|
|
December
31, 2016 (Restated)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,851
|
|
|
$
|
952
|
|
|
$
|
3,803
|
|
Water assets
|
|
|
32,135
|
|
|
|
(952
|
)
|
|
|
31,183
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued
operations held for sale
|
|
|
3,639
|
|
|
|
(798
|
)
|
|
|
2,841
|
|
Notes Payable, net
of current portion
|
|
|
4,758
|
|
|
|
798
|
|
|
|
5,556
|
|
NOTE
10 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $12,924,000
and $10,727,000 during the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, the Company has a working
capital deficit and an accumulated deficit of approximately $24,700,000 and $90,000,000, respectively. The HCIC seller carry back
debt and the GrowCo notes are in technical default. The $4M GrowCo Note is classified as current due to the holders’ right
to call the note upon 60-day’s notice. GrowCo has received notification of an entity holding $2,115,000 of this debt of
its intent to collect the amount of the note, plus back due interest and attorney fees.
These
factors raise doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification
of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe
management’s plans to mitigate.
Since
December 31, 2017 to March 21, 2018 the Company has collected $535,000 under its financing arrangement with Powderhorn LLC under
debt/equity financing. Currently GrowCo, through GCP1 is receiving rent payments on one-half of the first greenhouse. The first
use of these funds will be to pay GCP1 accounts payable including GCP1’s obligation to GrowCo. In addition, the Company
has received $252,000 in preferred investment into its Water Redevelopment subsidiary. We are in the process of securing additional
debt financing on the land and water assets that we own that are unencumbered.
Additionally,
we continue to reduced our general and administrative and cash required for our operations.
Management
Plans
The
Company has implemented a new strategy involving focusing on its water assets along with associated capital raises through the
formation of Water Redevelopment Company (“WRC”). It is planned that WRC will provide the asset value necessary to
obtain additional financing.
We
believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical
operating results. We believe the actions will satisfying our estimated liquidity needs 12 months from the issuance of the financial
statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability
of additional financing, or whether such actions would generate the expected liquidity as currently planned.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
January 2016, the Company entered into a new lease with the Colorado Center in Denver Colorado for the corporate headquarters.
The space is 1,775 square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The
lease terminates on June 30, 2018. On March 1, 2017 the Company entered into a sub-lease agreement with our related party McGrow
for these office facilities.
The
amounts due at the base rate are as follows:
Period
|
|
|
Amount
Due
|
|
|
2018
|
|
|
$
|
32,000
|
|
In
February 2017 we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This
space is 1,554 square feet and monthly payments of $2,201 which began on April 1, 2017. The lease terminates on March 31, 2020.
The amounts due at the base rate are as follows:
Period
|
|
|
Amount
Due
|
|
|
2018
|
|
|
$
|
28,000
|
|
|
2019
|
|
|
$
|
28,000
|
|
|
2020
|
|
|
$
|
7,000
|
|
Defined
Contribution Plan
Two
Rivers does not have a defined contribution plan.
Employment
Agreements
Effective
January 1, 2011, the Company entered into an employment agreement with Wayne Harding, as CFO. The initial term of the contract
was one year, which renews automatically for successive one-year terms unless and until either party delivers notice of termination
within 30 days of the expiration of the then current term. The original employment agreement was modified in 2017.
The
Board determines annual incentive compensation at the Board’s sole discretion. If there is a change of control, each is
entitled to an accelerated option vesting.
GCP
2 Construction
The
GCP 2 greenhouse is partially completed. We estimate that the cost to complete the second greenhouse is approximately $3,000,000.
At this time we do not have the necessary funds to complete GCP2 construction.
Suncanna
Litigation
In
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
|
●
|
On
April 14, 2016, we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
|
|
|
|
|
●
|
Due
to the suspension order, Suncanna was in violation of its lease agreement with us. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna. Consequently, during the quarter ended March 31, 2016, we stopped recognizing
lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent that had been recorded as of December
31, 2015. We also wrote off advances to Suncanna totaling $587,000.
|
|
|
|
|
●
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate
the greenhouse by September 6, 2016.
|
|
|
|
|
●
|
On
August 31, 2016, a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
|
|
|
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and
began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016.
|
|
|
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this
decision.
|
Management
believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna
lease agreement.
Prior
board of directors litigation
On
August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey
Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services
rendered to the former board members at their behest while members of the board. At present, the matter is scheduled for trial
in October, 2018. The $139,000 is included in our accounts payable on the balance sheet.
DFP
litigation
On
October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft.
We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed
a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are
in excess of any counter claims.
GrowCo
– Blue Green litigation
On
January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on
payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is
requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
State
of Colorado litigation
The
Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders
have been involved in litigation 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. In the quarter ending March 31, 2016, the Company entered into a stipulation agreement with
the State, settling the State’s claims, whereby the Company agreed to take the existing dam structure down to the sediment
level by March 31, 2018. The Company 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. It anticipates that it will by late 2018. The Company also intends to work with the
Colorado State Engineer to construct a new dam close to the prior dam structure, pending financing. Also as part of the litigation,
Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. This part
of the litigation awaits a trial setting. The State is requesting the Company to pay $100,000 as a penalty for violating the stipulation
agreement. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.
NOTE
12 – RELATED PARTY TRANSACTIONS
Pursuant
to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2017, management has evaluated related parties
and all transactions associated with those and determined that no transactions exist which would require disclosure, except as
disclosed below:
|
●
|
Wayne
Harding, Company CEO provided a short term loan to the Company of $25,000. The loan is secured by land assets of the Company
and carried an interest rate of 12%. The loan was paid off in the third quarter of 2017.
|
|
●
|
Advances
totaling $34,400 resulting in a cumulative total of $72,999 for greenhouse expenses to Johnny Cannaseed, LLC which is majority
owned by former Company CEO John McKowen.
|
|
●
|
Revenue
totaled $620,000 has been recorded for leasing income from Johnny Cannaseed.
|
|
●
|
Advances
totaled $26,957 resulting in a cumulative total of $43,798 for greenhouse expense to McGrow, LLC which is partially owned
by former Company CEO John McKowen.
|
|
●
|
Payments
totaling $335,531 to MCG Services, LLC which is majority owned by former Company CEO John McKowen for costs associated with
a services agreement with GrowCo.
|
|
●
|
Advances
to MCG Services, LLC totaled $13,295. This amount was written off.
|
|
●
|
Payments
totaling $11,210 to John McKowen for interest expense on a loan held by Mr. McKowen to GrowCo.
|
|
●
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have invested approximately $11.0M in GrowCo
securities.
|
|
●
|
The
Chief Executive Officer of Two Rivers serve as the only members of the Sunset Metropolitan District (Sunset). Sunset is a
quasi-governmental agency operating under Title 32 of the State of Colorado Constitution. As of December 31, 2017, the Company
had advanced $81,000 to Sunset.
|
|
●
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed.
|
|
●
|
The
Company leases its former corporate headquarters office space to McGrow. Total lease payments are $47,000 per year.
|
|
●
|
Wayne
Harding, Company CEO provided a long-term loan to the Company of $50,000. The loan is secured by land assets of the Company
and carries an interest rate of 18%.
|
|
●
|
Wayne
Harding provided a short-term loan to the Company of $32,500 in the quarter ended December 31, 2017. $17,500 was repaid before
the year ended December 31, 2017. The remainder, $15,000 plus interest was paid in February 2018.
|
NOTE
13 – SUBSEQUENT EVENTS
Pursuant
to FASB ASC 855, management has evaluated all events and transactions that occurred from December 31, 2017 through the date of
issuance of these financial statements. During this period, the Company did not have any significant subsequent events, except
as disclosed below.
Effective
February 1, 2018, our CFO and Secretary, Bill Gregorak resigned his positions and employment with the Company.
On
February 9, 2018, Two Rivers entered into a securities purchase agreement, or the SPA, with Powderhorn, LLC, pursuant to which
we issued to Powderhorn a 12.5% original issue discount convertible promissory note, or the Note, in the principal amount of $675,000
in exchange for $600,000 in cash. Under the SPA, we agreed to file a registration statement to register the sale of up to 8,000,000
shares of common stock by Powderhorn and to use our reasonable best efforts to have the registration statement declared effective
by the Securities and Exchange Commission by April 11, 2018. On February 9, 2018, we filed a registration statement on Form S-1
with the Securities and Exchange Commission in accordance with the SPA. On April 2, 2018, Powderhorn agreed that, provided the
Company makes a specified amortization payment by the close of business on April 9, 2018, Powderhorn will waive any and all obligations
of the Company to have an effective Form S-1 until May 8, 2018. Subject to certain permitted exceptions, if the SEC does not declare
the registration statement effective by May 8, 2018 or if we fail to keep the registration statement effective, we will be required
to pay liquidated damages to Powderhorn.
As
described above under “State of Colorado litigation” in Note 11, the Company, the State of Colorado (Office of the
State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation 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)). On April 3, 2018, the
Company was notified that the State of Colorado had filed a motion for the issuance of a contempt of court citation based upon
the Company’s failure to comply with a consent decree to bring the Cucharas #5 reservoir down to silt level by March 31,
2018. The Company was unable to fully comply with the consent decree due to lack of capital. The Company 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. The State is requesting the Company to pay $100,000 as a penalty for
violating the stipulation agreement. The Company’s engineering firm estimate the cost to breach the dam structure to be
between $1.8 to $2.2 million.
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13.
|
Other
Expenses of Issuance and Distribution.
|
The
following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities
being registered hereby, all of which will be borne by us (except any underwriting discounts and commissions and expenses incurred
by the selling shareholder for brokerage, accounting, tax or legal services or any other expenses incurred by the selling shareholder
in disposing of the shares). All amounts shown are estimates except the Securities and Exchange Commission, or SEC, registration
fee.
|
|
Amount
|
|
SEC registration fee
|
|
$
|
289
|
|
Accounting fees and expenses
|
|
|
1,800
|
|
Legal fees and expenses
|
|
|
25,000
|
|
Miscellaneous
fees and expenses
|
|
|
2,911
|
|
Total expenses
|
|
$
|
30,000
|
|
Item
14.
|
Indemnification
of Directors and Officers.
|
Section
7-109-101 et seq. of the Colorado Business Corporation Act, or CBCA, empowers a Colorado corporation to indemnify its directors,
officers, employees and agents under certain circumstances and subject to certain exceptions.
A
corporation must indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to
which the person was a party because the person is or was a director, officer, employee, fiduciary or agent, against reasonable
expenses incurred by him or her in connection with the proceeding.
A
corporation may indemnify a person made a party to a proceeding because the person is or was a director, officer, employee, fiduciary
or agent if the person conducted himself or herself in good faith and the person reasonably believed that his or her conduct was
in or not opposed to the best interests of the corporation (or in the case of a criminal proceeding, had no reasonable cause to
believe that his or her conduct was not unlawful), except that no indemnification is allowed in connection with a proceeding by
or in the right of the corporation in which the person seeking indemnification was adjudged to be liable to the corporation or
in connection with any other proceeding in which the person was adjudged liable on the basis that he or she derived an improper
personal benefit.
Our
restated articles of incorporation provide that we shall indemnify our directors, officers, employees, fiduciaries, and agents
to the full extent permitted by Colorado law. Our restated articles of incorporation also provide that the indemnification provided
by this article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing,
both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of heirs,
executors, and administrators of such a person.
We
have entered into indemnification agreements with our directors and executive officers. In general, these agreements provide that
we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity
as a director or officer of our company or in connection with their service at our request for another corporation or entity.
The indemnification agreements also provide for procedures that will apply in the event that a director or executive officer makes
a claim for indemnification and establish certain presumptions that are favorable to the director or executive officer.
Section
7-108-402 of the CBCA provides for elimination of personal liability of directors of a Colorado corporation for monetary damages
for breach of fiduciary duty as a director if so provided in the corporation’s articles of incorporation, except that any
such provision shall not eliminate or limit the liability of a director to the corporation or to its shareholders for monetary
damages for any breach of the director’s duty of loyalty to the corporation or to its shareholders, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of law, acts specified in Section 7-108-403 of the
CBCA (relating to unlawful payment of dividend or unlawful stock purchase or redemption), or any transaction from which the director
directly or indirectly derived an improper personal benefit. Our restated articles of incorporation provide that, to the fullest
extent provided in the CBCA, our officers, directors, fiduciaries, and agents shall not be liable to us or our shareholders for
monetary damages.
Section
7-109-108 of the CBCA provides that a corporation may purchase and maintain insurance on behalf of a person who is or was a director,
officer, employee, fiduciary, or agent of the corporation, or who, while a director, officer, employee, fiduciary, or agent of
the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary,
or agent of another domestic or foreign entity or of an employee benefit plan, against liability asserted against or incurred
by the person in that capacity or arising from the person’s status as a director, officer, employee, fiduciary, or agent,
whether or not the corporation would have power to indemnify the person against the same liability under the provisions of the
CBCA. Our restated articles of incorporation contain a similar provision. We maintain a general liability insurance policy that
covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities
as directors or officers.
Insofar
as the foregoing provisions permit indemnification of directors, executive officers, or persons controlling us for liability arising
under the Securities Act of 1933, as amended, or the Securities Act, we have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item
15.
|
Recent
Sales of Unregistered Securities.
|
Set
forth below is information regarding shares of the common stock, and warrants, and other securities convertible into, or exchangeable
or exercisable for, common stock, by us within the past three years that were not registered under the Securities Act. Included
is the consideration, if any, we received for such shares and information relating to the section of the Securities Act, or rule
of the SEC, under which exemption from registration was claimed:
|
(1)
|
between
June 2015 and July 2017 we issued a total of 295,376 shares of common stock upon conversions of preferred membership units
of TR Capital Partners LLC;
|
|
|
|
|
(2)
|
between
August 2016 and January 2017 we issued a total of 1,104,901 shares of common stock in return for cancellation of debt obligations
in the aggregate amount of $352,236.93;
|
|
|
|
|
(3)
|
between
December 2016 and July 2017 we issued a total of 1,773,834 shares of common stock upon exercises of warrants for consideration
aggregating $675,460.56; and
|
|
|
|
|
(4)
|
between
August 2017 and December 2017 we issued a total of 287,750 shares of common stock in return for cancellation of debt obligations
in the aggregate amount of $76,886.80
|
The
sales of unregistered securities described in paragraph (1) were deemed to be exempt from registration under the Securities Act
in reliance on Section 3(a)(9). The sales of unregistered securities described in paragraphs (2) and (3) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) and Regulation D.
Item
16.
|
Exhibits
and Financial Statement Schedules.
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Articles of Incorporation of Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
25, 2013
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amendment to Restated Articles of Incorporation of Two Rivers Water & Farming Company, dated September 21, 2017
|
|
|
|
S-1
|
|
February
9, 2018
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
By-laws of Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
25, 2016
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
certificate evidencing common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
12.5% original issue discount convertible promissory note issued to Powderhorn I, LP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1
|
|
Opinion of Faegre Baker Daniels LLP
|
|
|
|
S-1
|
|
February
9, 2018
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Agreement and Plan of Merger dated as of September 14, 2010 among Two Rivers Water & Farming Company, TRWC, Inc. and Two Rivers Basin, LLC
|
|
|
|
8-K
|
|
September
22, 2010
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Form of Promissory Note of Two Rivers Water & Farming Company
|
|
|
|
8-K
|
|
April
3, 2012
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to Purchase Agreement regarding Orlando Reservoir No. 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3a
|
|
Purchase Agreement dated as of September 22, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.3b
|
|
First Amendment dated as of October 14, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.3c
|
|
Second Amendment dated as of November 17, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.4
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.3d
|
|
Third Amendment dated as of November 19, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.3e
|
|
Fourth Amendment dated as of January 28, 2011 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to acquisition of Orlando Membership Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4a
|
|
Second Amendment dated as of September 7, 2011 among Orlando Reservoir No. 2 Company, LLC, Family Ranch Holdings, LLC, Two Rivers Water & Farming Company, TRWC, Inc., TRW Orlando Water Assets, LLC and Two Rivers Farms F-2, LLC
|
|
|
|
8-K
|
|
September
12, 2011
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
10.4b
|
|
Promissory Note dated as of September 7, 2011 of Orlando Reservoir No. 2 Company, LLC and TRW Orlando Water Assets, LLC issued to Family Ranch Holdings, LLC
|
|
|
|
8-K
|
|
September
12, 2011
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Purchase and Supply Agreement dated as of September 21, 2011 between Aurora Organic Farms, Inc. and Two Rivers Water & Farming Company
|
|
|
|
8-K
|
|
September
22, 2011
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to acquisition of assets of Dionisio Produce & Farms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6a
|
|
Master Agreement dated as of April 12, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Russell L. Dionisio, Two Rivers Farms, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.2
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.6b
|
|
First Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Two Rivers Farms, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.3
|
|
|
|
|
|
|
|
|
|
|
|
10.6c
|
|
Second Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
10.6d
|
|
Third Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
10.6e
|
|
Second Closing dated as of November 2, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Russell L. Dionisio, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.6
|
|
|
|
|
|
|
|
|
|
|
|
10.6f
|
|
Assignment of Trademark dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC and TR Bessemer, LLC
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.7
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.6g
|
|
Bill of Sale dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.8
|
|
|
|
|
|
|
|
|
|
|
|
10.6h
|
|
Promissory Note dated as of November 2, 2012 of RR Bessemer, LLC issued to R&S Dionisio Real Estate and Equipment
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
10.6i
|
|
Assignment of Produce Contracts among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.10
|
|
|
|
|
|
|
|
|
|
|
|
10.6j
|
|
Lease Agreement dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.12
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
Series A Convertible Preferred Stock Purchase Agreement dated as of November 25, 2012 among Dionisio Farms & Produce, Inc., TRWC, Inc. and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Farms F-1, LLC, Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Farms F-2, LLC, Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.7
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Commercial Lease Agreement dated as of August 29, 2014 between GrowCo, Inc. and Cool House Farms, LLC
|
|
|
|
8-K
|
|
September
4, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Commercial Lease Agreement dated as of August 29, 2014 between GrowCo, Inc. and Mojo MJ, LLC
|
|
|
|
8-K
|
|
September
4, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Real Estate Purchase Agreement dated as of September 16, 2014 between Two Rivers Water & Farming Company and Farmland Partners Inc.
|
|
|
|
8-K
|
|
September
18, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to Financing of TR Capital Partners, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14a
|
|
Limited Liability Company Agreement dated as of January 31, 2014 among TR Capital Partners, LLC and the Members named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.14b
|
|
Membership Interest Purchase Agreement dated as of January 31, 2014 among TR Capital Partners, LLC and the Investors named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.14c
|
|
Exchange Agreement dated as of January 31, 2014 among TR Capital Partners, LLC, Two Rivers Water & Farming Company and the Holders named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to 2005 Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
†
10.16
|
|
2005 Stock Option Plan
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to 2011 Long-Term Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
†
10.17a
|
|
2011 Long-Term Stock Plan
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.17
|
|
|
|
|
|
|
|
|
|
|
|
†
10.17b
|
|
Form of Restricted Stock Unit Award Agreement for Employees
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.17
|
|
|
|
|
|
|
|
|
|
|
|
†
10.17c
|
|
Form of Restricted Stock Unit Award Agreement for Non-Employees
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.17
|
|
|
|
|
|
|
|
|
|
|
|
†
10.19
|
|
Employment Agreement dated as of January 1, 2011 between John R. McKowen and Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
30, 2011
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
†
10.20
|
|
Employment Agreement dated as of August 30, 2017 between Wayne Harding and Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
April
9, 2018
|
|
10.20
|
|
|
|
|
|
|
|
|
|
|
|
†
10.21
|
|
Real estate lease between GrowCo Partners 1, LLC and Suncanna, LLC
|
|
|
|
10-K
|
|
March
30, 2016
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to Securities Purchase Agreement with Powderhorn I, LP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22a
|
|
Securities Purchase Agreement, dated as of February 9, 2018, by and between and Two Rivers Water & Farming Company and Powderhorn I, LP
|
|
|
|
8-K
|
|
February
16, 2018
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.22b
|
|
Amendment
dated as of April 2, 2018 to Securities Purchase Agreement by and between Two Rivers Farms, LLC and Powderhorn I, LP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries of Two Rivers Water & Farming Company
|
|
|
|
8-K
|
|
April
9, 2018
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent
of Eide Bailey, independent registered public accounting firm
|
|
X
|
|
|
|
|
|
|
(b)
Financial Statement Schedules.
No
financial statement schedules are provided because the information called for is not required or is shown either in the financial
statements or notes incorporated by reference herein.
Item
17. Undertakings.
|
(a)
|
The
undersigned Registrant hereby undertakes:
|
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
|
|
|
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities
offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective
Registration Statement; and
|
|
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration Statement;
|
provided,
however,
that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are incorporated
by reference in this Registration Statement.
(2)
That, for the purposes of determining any liability under the Securities Act, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b)
The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the
Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(c)
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised
that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURE
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aurora, State of Colorado,
as of April ●, 2018.
|
TWO
RIVERS WATER & FARMING COMPANY
|
|
|
|
|
By:
|
/s/
Wayne Harding
|
|
|
Wayne
Harding
|
|
|
Chief
Executive Officer and Acting Chief Financial Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed
below by the following persons in the capacities and as of April ●, 2018.
Signature
|
|
Title
|
|
|
|
/s/
Wayne Harding
|
|
Chief
Executive Officer, Chief Financial Officer and Chairman of the Board
|
Wayne
Harding
|
|
(Principal
Executive, Financial and Accounting Officer)
|
|
|
|
*
|
|
Director
|
Samuel
Morris
|
|
|
|
|
|
*
|
|
Director
|
Michael
Harnish
|
|
|
|
|
|
*
|
|
Director
|
Christopher
Bragg
|
|
|
|
|
|
*
|
|
Director
|
James
D. Cochran
|
|
|
*By
|
/s/
Wayne Harding
|
|
|
Attorney-in-Fact
|
|
Two Rivers Water and Far... (CE) (USOTC:TURV)
Historical Stock Chart
From Aug 2024 to Sep 2024
Two Rivers Water and Far... (CE) (USOTC:TURV)
Historical Stock Chart
From Sep 2023 to Sep 2024