PART
I
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.”
Beginning
in February 2018, we opened discussions with a group of hemp related companies. Two Rivers desired to find a source of
capital along with the ability to generate near-term revenue from the land and water assets owned by Two Rivers. Presently, Two
Rivers has entered into a stock exchange agreement for the purchase of 100% of the three entities: Vaxa Global, LLC (“Vaxa”);
Ekstrak Labs, LLC (“Ekstrak”), and Gramz Holdings, LLC (“Gramz”). Vaxa grows CBD hemp focused plants.
Ekstrak extracts CBD oil. Gramz produces and sells CBD extract in the form of both isolate and full-spectrum oil within end-user
products.
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:
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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.
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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 around the Orlando land back to the holder of seller
carry back financing in exchange for forgiveness on $187,000 of debt and associated accrued interest.
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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.
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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 within Pueblo County. 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
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Two Rivers Water & Farming Company
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2018 Financials
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GrowCo
(no longer consolidated effective April 1, 2018):
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. As of April 1, 2018, due to change of management and control, the Company no longer consolidates
GrowCo.
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Water
Redevelopment:
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.
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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:
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We
will seek to address the need for municipal water storage.
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We
believe there are a variety of opportunities to lease, both short term and long term, our water assets.
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We
have identified underutilized land that, along with the water we own, can be leased for agriculture activities.
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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.
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Our
principal water rights include the following:
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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. 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.
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Two Rivers Water & Farming Company
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2018 Financials
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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.
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An
acre-foot, or A.F., of water is the amount of water required to cover one acre to a depth of one foot. An acre-foot of water contains
325,851 gallons, generally considered enough water to supply two average households for a year. Annual irrigation in Southeastern
Colorado, depending on the crops, consumes approximately three to six acre-feet of water per acre of crop.
By
capturing water in reservoirs and releasing it later for irrigation purposes, we are able to retime the delivery of water throughout
the irrigation season and ameliorate some of the inconsistencies of seasonal and annual water availability for the farmland we
manage.
Surface
Water Rights
Tributary
ground water is any underground water that is hydraulically connected to a stream system and that influences the rate or direction
of flow in that stream system. Any new ground water diversions that are tributary to an over-appropriated stream system require
augmentation to offset out-of-priority depletions. In 2013, many well water users on the Arkansas River and its tributaries were
unable to use their wells, as drought conditions made augmentation water unavailable. In response, an augmentation provider requested
that we assist in building a more efficient and plentiful augmentation supply. We had intended to assist with an augmentation
supply, but due to capital requirements, we terminated those plans.
We
own the following surface water rights:
Structure
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Elevation
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Priority
No.
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Appropriation
Date
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Consumptive
Use
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Decreed
Amount
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Butte
Valley Ditch
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5,909
ft
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1
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5/15/1862
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360
A.F.
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1.2
cfs
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Butte
Valley Ditch
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9
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5/15/1865
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1.8
cfs
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Butte
Valley Ditch
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86
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5/15/1886
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3.0
cfs
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Butte
Valley Ditch
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111
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5/15/1886
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3.0
cfs
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Robert
Rice Ditch
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5,725
ft
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19
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3/01/1867
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131
A.F.
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3.0
cfs
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Orlando
Canal No. 3
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5,911
ft
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10/19/1906
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Huerfano
Valley Ditch
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4,894
ft
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120
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2/2/1888
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2,891
A.F.
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42.0
cfs
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Huerfano
Valley Ditch
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342
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5/1/1905
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18.0
cfs
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“Consumptive
use” is the term for the portion of a water diversion right that is actually consumed by its beneficial use. Where the beneficial
use is agricultural irrigation, consumptive use represents the amount of water consumed by the irrigated crop or evaporated on
the farm. After deducting consumptive use from the amount of water diverted and applied to irrigation, the remainder is described
as “return flow” to the system. Such return flows are generally subject to appropriation downstream. Only the consumptive
use portion of a given water right is subject to transfer (that is, a change in the point of diversion, place of use, or purpose
of use). Therefore, water rights are often assigned monetary value based on the consumptive use portion. Although consumptive
use varies by crop, rainfall, temperature and other factors, in southeastern Colorado, crops generally consume about two acre-feet
of applied water for each acre planted, depending on the crops planted. In order to provide that amount of consumptive use water,
an irrigator must generally apply three acre-feet of water (allowing for predictable return flow equal to about one-third of the
applied water). We measure our water rights both in terms of the amount of the diversion or storage right, as the case may be,
but also in terms of the historic consumptive use.
Two Rivers Water & Farming Company
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2018 Financials
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Storage
Rights and Infrastructure
The
following table presents our holdings of storage water rights:
Structure
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Elevation
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Priority
No.
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Appropriation
Date
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Average
Annual Yield (A.F.)
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Decreed
Amount (A.F.)
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Estimate
of
Current
Effective
Storage (A.F.)
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Huerfano
Valley Reservoir
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4,702
ft
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6
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2/2/1888
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1,424
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2,017
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1,000
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Cucharas
Valley Reservoir
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5,570
ft
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66
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3/14/1906
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3,055
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31,956
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Current
no-fill restriction*
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Cucharas
Valley Reservoir**
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5,705
ft
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66c**
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3/14/1906
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34,404
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Orlando
Reservoir # 2
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5,911
ft
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349
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12/14/1905
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1,800
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3,110
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1,500
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*
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See
description below regarding litigation.
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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.
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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 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 sought to have certain
water rights demands by the neighboring water rights holders deemed wasteful. The Company has withdrawn this suit with prejudice,
and the Welton Land and Water Co. have been awarded $204,000 in legal fees that remain unpaid, which we have recognized in accrued
expenses.
In
the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s
claims at that time. Under the stipulation agreement, Two Rivers agreed to take the existing dam structure down to the sediment
level by March 31, 2018. Two Rivers was able to empty all the water in the Dam but was not able to meet the requirements of the
agreement by March 31, 2018 due to lack of capital. On April 3, 2018, the State filed a motion for the issuance of a contempt
of court citation against the Company, its then directors, and former director and CEO John McKowen, and certain other individuals
for breach of the agreement seeking sanctions, imposition of a civil penalty of $100,000 and payment of legal fees. The Company
and its then directors are contesting the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary
and unduly punitive. Preliminary hearings for the defendants were held on May 10 and June 8, 2018. At the May 10, 2018 hearing
it was determined that the State of Colorado could proceed with its action. At the June 8 hearing, a trial date of December 17,
2018 was set by the Court that was subsequently postponed to October 2019.
The
Company intends to continue its efforts to seek funding so that it can comply with the agreement. In the three months ended December
31, 2018 the Colorado State Engineer (the “State”) began to take the existing dam down. This work was completed in
January 2019. The State has estimated that the deconstruction work with associated fees and penalties is approximately $1,300,000.
As of December 31, 2018 we have accrued a liability and other expenses of $1,800,000 for this work including a $185,000 fine to
the County of Huerfano. At this time, the Company does not have funds to pay the State or the County the amounts due each but
is actively seeking the required capital.
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.
Two Rivers Water & Farming Company
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2018 Financials
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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 it 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.
Formation
of Water Redevelopment
In
the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate
from use in irrigating farmland, that could benefit our stakeholders, including our shareholders and the communities near where
our water assets are located. On September 30, 2016, our board of directors established a board-level task force to identify opportunities
for our existing water assets, and perhaps acquired water assets. As a result of that investigation, water is a new top-priority
for our Company.
Based
on findings from our water task force, we believe we have several opportunities to capitalize on water assets that we currently
own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and
other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following:
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We
will seek to address the need for both agricultural and municipal water storage. As discussed in the 2015 Colorado Water Plan
and its Executive Summary Colorado has set a goal of attaining an additional 400,000 acre feet of storage by 2050. (Board)
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We
believe there are a variety of opportunities to lease, both short term and long term, our water assets.
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We
have identified underutilized land and water that we own that could be used to lease to agricultural operators including growers
of marijuana and hemp.
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Two Rivers Water & Farming Company
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2018 Financials
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In
January 2011, we entered into a water supply agreement to supply water resources for real estate development in Huerfano County,
Colorado. In late 2019 we intend to begin the development and legal process to begin to deliver raw water to this development.
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Agreement
to Purchase Companies – Subsequent Event
On
February 22, 2019, we entered into a share exchange agreement pursuant to which we agreed to acquire the 100% membership interest
in Vaxa Global, LLC, or Vaxa, from Easby Land & Cattle Company, LLC, or Easby, in exchange for 30,000,000 shares of our common
stock and an earn-out arrangement for up to 20,000,000 additional shares of our common stock.
Vaxa
owns a 100% membership interest in each of Ekstrak Labs LLC, (“Ekstrak”), and Gramz Holdings, LLC, (“Gramz”).
Vaxa has been operating since 2014. Ekstrak has been operating since 2017. Gramz has been operating since 2015.
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Vaxa
grows CBD hemp focused plants.
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Ekstrak
extracts CBD hemp oil.
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Gramz
produces and sells CBD extract in the form of both isolate and full-spectrum oil, compounds, such as Gramz Herbal Topical
and Gramz Whole Plant Matrix Sublingual Drops, which has been developed to exploit the medicinal and therapeutic benefits
of hemp.
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If
the proposed acquisition is completed, we expect Vaxa will expand their operations to grow hemp on land owned, and with water
supplied, by Two Rivers. This will provide additional hemp products to Ekstrak and Gramz.
We
will issue to Easby a total of 30,000,000 shares of common stock at closing. In addition, we may be required to issue additional
shares pursuant to an earn-out covenant in the share exchange agreement. The number of earn-out shares will equal the lesser of
the quotient of (a) 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa
(including Ekstrak and Gramz) for the year ending March 31, 2020 (or, if the parties agree to extend the required closing date
to a date not later than July 15, 2020, the year ending June 30, 2020), divided by $1.00; and 20,000,000.
It
is expected that the earn-out shares, if any, would be issued by May 2020 (or by August 2020, if the parties extend the closing
date as described in the preceding sentence).
The
closing must occur on or before April 15, 2019, unless otherwise agreed upon by the parties. It is anticipated that an extension
will be necessary and both parties will agree to an extension. The closing is subject to standard conditions, as well as a requirement
that we enter into an agreement with holders of outstanding preferred units of TR Capital Partners, LLC, or TRCP, pursuant to
which all of the outstanding TRCP preferred units will be exchanged for shares of our common stock. We will seek to complete the
exchange for TRCP preferred units in order to, among other things, significantly simplify our capital structure.
Our
Organizational Structure
Since
commencing operations as a farming and water company in 2009, we have built an organizational structure that enabled us to raise
capital for specific projects completed by our direct and indirect subsidiaries.
In
January 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional
operations. We formed TR Capital Partners, LLC or TR Capital, which issued all of its common units to the Two Rivers. In a series
of transactions from January to September 2014, TR Capital entered into Membership Interest Purchase Agreements pursuant to which
it issued and sold a total of 30,158,815 preferred units to investors in exchange for consideration comprised of $6.0 million
in cash and $18.9 million of outstanding equity and equity-related securities of our subsidiaries other than HCIC Holdings, LLC
and Huerfano-Cucharas Irrigation Company.
Two Rivers Water & Farming Company
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2018 Financials
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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 12% of the preferred
unit holders’ aggregate capital contributions and net income, if any, over the 8% base return TR Capital for each 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 net
income 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.
Pursuant
to a binding letter of intent signed with potential outside strategic partners, the accrual of the 2% of TR Capital’s preferred
unit holders distribution was suspended effective for the period beginning July 1, 2018.
Pursuant
to an Exchange Agreement dated as of January 31, 2014 entered into with TR Capital and Two Rivers, any holder may surrender a
TR Capital preferred unit to Two Rivers at any time for consideration consisting of (a) accrued but unpaid preferred distributions
on the preferred unit through the exchange date, (b) one share of common stock and (c) a warrant to purchase an additional one-half
share of common stock at a price of $2.10 per share. TR Capital may require (with limited exceptions) each of its outstanding
preferred units to be surrendered to Two Rivers in exchange for such consideration at any time after January 31, 2017, at which
(1) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange
for a closing price of at least $3.00 and (b) a registration statement filed by us with the SEC is effective with respect to the
shares of common stock, including shares purchasable pursuant to warrants, issuable upon such exchanges. Each warrant issued upon
any such exchange generally will be exercisable at any time on or before January 31, 2019, subject to our right to redeem the
warrant at any time after January 31, 2017, at which (A) for a period of 20 trading days, at least 250,000 shares of common
stock have been traded on a national securities exchange for a closing price of at least $3.00 and (B) a registration statement
has been filed and is effective with respect to the shares of common stock issuable pursuant to such warrant. Under the Exchange
Agreement, Two Rivers also granted holders of preferred units one-time demand registration rights under which Two Rivers may be
required to file a registration statement covering shares of common stock (including shares subject to warrants) issued or issuable
upon exchanges of TR Capital preferred units. As of April 4, 2019, Two Rivers could be required under Two Rivers to issue and
deliver to holders of outstanding TR Capital preferred units, upon exchange, up to 26,294,200 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.
In
February 2019, a stock exchange agreement was signed with potential strategic partners that requires an agreement to be executed
between the Company and TR Capital preferred units to exchange all preferred units into the Company’s common shares.
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 Colorado Corporation. For a more detailed description
of ownership structure please refer to exhibit 21.1 filed herewith.
Corporate
Information
Two
Rivers’ is a Colorado corporation with principal executive offices at 3025 S Parker Rd, Suite 140, Aurora, Colorado, 80014
and our telephone number at that address is (303) 222-1000. Our website address is
www.2riverswater.com
. The information
on our website is not part of this report.
Competition
Water
The
rights to use water in Colorado have been fully appropriated to beneficial uses (such as agriculture irrigation and municipal
and industrial applications) under court decrees and state regulation according to the prevailing Prior Appropriation Doctrine
in which more senior (older) water rights take precedence in times of shortage over junior (newer) water rights. Notwithstanding
significant conservation, growth in Colorado with related incremental demands for water has made the rights to divert, convey,
store and use water relatively scarce and valuable. There is significant competition for the acquisition and beneficial use of
historic water rights. Many competitors for the acquisition of such rights have significantly greater financial resources, technical
expertise and managerial capabilities than we do and, consequently, we could be at a competitive disadvantage in assembling, developing
and deploying water assets required to support our businesses. Competitors’ resources could overwhelm our efforts and cause
adverse consequences to our operational performance. To mitigate such competitive risks, we concentrate our efforts in the Huerfano
and Cucharas Rivers watershed where our local knowledge and control of a portfolio of water rights, storage facilities, distribution
canals and productive farmland creates a somewhat protected geographic niche. To further mitigate competitive risk, we strive
to actively engage with both the farming and municipalities in southeastern Colorado to explore strategies for cooperatively addressing
challenges and opportunities faced by those communities—particularly to address the 130,000 acre-foot shortfall in water
supplies on the Front Range, without taking valuable farmland out of production.
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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 (meaning west of the Continental Divide), 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 Colorado State Engineer. Water rights claims are filed in the water courts, adjudicated
as necessary to resolve any adverse claims, and then decreed though an enforceable judgment. The State Engineer is charged with
administering the accorded priorities among the various water rights in each of the state’s river systems.
Colorado
water law further recognizes two distinct but related prior appropriative rights: direct diversion rights and storage rights.
Direct diversion rights permit a user in priority to divert water directly from the river for immediate beneficial use (such as
irrigation); storage rights permit a user in priority to divert water from the river and impound the water in a reservoir to re-time
the water for later beneficial use. Thus, in Colorado, a direct diversion right must be conveyed to an immediate use; it cannot
be stored without a storage right. As a result, both types of appropriative rights are often paired, when possible, so that in
priority diversion rights can be re-timed through the exercise of a companion storage right to address seasonal and year-to-year
variability in natural supplies. The older the appropriation date of any water right, the more reliable is its yield; similarly,
the more effectively a senior diversion right is paired with a senior storage right, the more reliable each becomes.
Administration
of Water Rights
In
addition to the intra-state administration of water flowing in its rivers, Colorado also has inter-state water administration
responsibilities because each of its major rivers (the Colorado, the North Platte and the Arkansas) is governed as well by interstate
compacts with downstream states. These compacts are subject to judicial review, interpretation and enforcement under the original
jurisdiction of the U.S. Supreme Court to resolve disputes among the states. In 1948, Colorado and Kansas reached an agreement
that apportioned the water of the Arkansas River; Colorado was apportioned 60% of the water while Kansas is apportioned 40% of
the River’s flow. In order to comply with Colorado’s obligations under the Arkansas River Compact, therefore, water
rights on the Arkansas and its tributaries (including the Huerfano and Cucharas Rivers) are administered to assure the compact-required
water flows at the Colorado-Kansas state line. When necessary, Colorado’s in-state uses are curtailed, in reverse order
of priority, to assure compliance with the compact.
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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.
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.
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, a two-stage development project budgeted at $1.45 billion primarily
funded by four regional water purveyors including Colorado Springs. Phase One of the 62-mile water supply pipeline began operations
in 2016. 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.
Employees
At
March 31, 2019, we had three full-time employees, of which two are employed at our Aurora headquarters and one works remotely
from Pueblo and Huerfano County area as our ditch manager. None of our employees are covered by a collective bargaining agreement.
We consider our relationship with our employees to be good.
Available
Information
We
file reports with the SEC, which we make available on our website free of charge. These reports include annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on
our website as soon as reasonably practicable after we electronically file it with the SEC. You can also read and copy any materials
we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional
information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC, including us.
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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.
Risk
Factors Relating to Our Business
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 approximately $95 million as of December 31, 2018. While for the year ended December 31, 2018 we recorded a net profit of approximately
$2.7 million, we incurred an operational use of cash of approximately $1.1 million. Previously, we incurred net losses
from continuing operations before taxes (excluding results from discontinued operations) of approximately $11.7 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 land could have a material impact on our business.
Our
water rights and land are subject to mortgages. If we default on a mortgage, we could lose the underlying assets. Further, the
Company has provided collateral on some of its land and water assets to investors in GrowCo. 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:
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rainfall,
runoff, flood control and availability of reservoir storage,
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availability
of water in the Arkansas River watersheds,
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the
amount of useable water stored in reservoirs and ground water basins,
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the
amount of water used by our customers and others,
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water
quality, and
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legal
limitations on production, diversion, storage, conveyance and use.
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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:
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adversely
affect our supply thereby limiting our revenue, or
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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.
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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. Further,
changes in governmental regulations where we operate could have adverse effects on our business and subject us to additional regulatory
actions. For a detailed list and explanation of legal proceedings, please refer to the Legal Proceedings section herein.
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.
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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.
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.
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.
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.
Changing
economic conditions and the effect of such changes on accounting estimates could have a material impact on our results of operations.
The
Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure
of contingent assets and liabilities to prepare its consolidated financial statements pursuant to the rules and regulations of
the SEC and other accounting rulemaking authorities. Such estimates primarily relate to the valuation of stock options for recording
equity-based compensation expense, allowances for doubtful accounts receivable, valuation allowances for deferred tax assets,
legal matters and other contingencies, as applicable. As future events and their effects cannot be determined with precision,
actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these
estimates and will be reflected in the Company’s financial statements in the event they occur. Such changes could result
in a material impact on the Company’s results of operations.
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The
requirements of being a public company may strain our resources and distract management.
As
a result of filing the registration statement, we are subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).
These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to
our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures
and internal controls over financial reporting.
We
may incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate
governance requirements. We expect all of these applicable rules and regulations to significantly increase our legal and financial
compliance costs and to make some activities more time consuming and costly. This may divert management’s attention from
other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director
and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals
to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect
to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Ineffective
internal controls could impact the Company’s business and operating results.
The
Company’s internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations
of internal controls, including the possibility of human error, the circumvention or overriding of controls, poorly designed or
ineffective controls, or fraud. Internal controls that are deemed to be effective can provide only reasonable assurance with respect
to the preparation and fair presentation of the Company’s financial statements. If the Company fails to maintain the adequacy
of its internal controls, including the failure to implement new or improve existing controls, or fails to properly execute or
properly test these controls, the Company’s business and operating results could be negatively impacted and the Company
could fail to meet its financial reporting obligations.
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 April 11, 2019, 50,350,180 shares of common stock were outstanding. If holders convert their TR Capital Partners,
LLC preferred units into shares of common stock, we would issue up to an additional 29,754,782 shares of common stock. In addition,
as of April 5, 2019, there were additional warrants outstanding to acquire 3,368,952 at prices between $0.32 to $1.00 per common
share. As of December 31, 2018 there were a total of 2,879,215 options outstanding to purchase the Company’s common shares
with strike prices between $0.13 to $1.25 per share. Investors in the preferred units of GrowCo Partners 1, LLC (GCP1) hold 7,377,019
preferred units. Each GCP1 preferred unit can be exchanged into one Company’s common share.
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 stockholders, which may result in our inability to fund our working capital requirements and
harm our operational results.
At
December 31, 2018 we were critically low on cash, which was approximately $6,000. 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 stockholders would be reduced, and these newly issued securities might have rights, preferences or privileges senior to
those of existing stockholders.
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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:
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control
of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
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manipulation
of prices through prearranged matching of purchases and sales and false and misleading press releases;
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“boiler
room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
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excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, causing
investor losses.
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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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page
14
|
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.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our
corporate headquarters are located in Aurora, Colorado, where we lease 1,554 square feet of office space pursuant to a lease agreement
that will expire on March 31, 2020. We believe that our current office facilities will be sufficient to meet our operational needs
for the remainder of the existing lease term and that, upon the expiration of our current lease term, we will be able to extend
our lease or lease suitable replacement office space as needed on acceptable, commercially reasonable terms.
We
operate in the combined watershed area of the Huerfano River and Cucharas River in the Arkansas River Basin, an area encompassing
approximately 1,500 square miles on the southern Front Range in Colorado. As of December 31, 2018, we managed a total of 6,265
acres of land that we acquired since 2009, as shown in the following table. The following table presents the number of acres we
owned by usage as of the dates indicated:
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Irrigable
farmland:
|
|
|
|
|
|
|
|
|
Farmed
|
|
|
-
|
|
|
|
-
|
|
Developed
but not farmed
|
|
|
725
|
|
|
|
725
|
|
Undeveloped
|
|
|
1,647
|
|
|
|
1,920
|
|
Total
irrigable land
|
|
|
2,372
|
|
|
|
2,645
|
|
Non-producing
land:
|
|
|
|
|
|
|
|
|
Greenhouse
development
|
|
|
157
|
|
|
|
157
|
|
Grazing
land
|
|
|
3,097
|
|
|
|
3,097
|
|
Strategic
water holdings
|
|
|
239
|
|
|
|
239
|
|
Other
strategic holdings
|
|
|
400
|
|
|
|
400
|
|
Total
non-producing land
|
|
|
3,893
|
|
|
|
3,893
|
|
Totals
|
|
|
6,265
|
|
|
|
6,538
|
|
The
following table presents the number of acres we owned by location as of the dates indicated:
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
El
Paso
|
|
|
2,066
|
|
|
|
2,339
|
|
Huerfano
|
|
|
2,324
|
|
|
|
2,324
|
|
Pueblo
|
|
|
1,875
|
|
|
|
1,875
|
|
Totals
|
|
|
6,265
|
|
|
|
6,538
|
|
Two Rivers Water & Farming Company
|
2018 Financials
|
Page
15
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
During
2018, the Company settled a lawsuit brought by a prior tenant of the GrowCo Partners 1, LLC greenhouse, Suncanna, LLC. The Company
paid $50,000 to settle the Suncanna legal action.
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 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, 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. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation
agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion
for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.
The
State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former
director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two Rivers
to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November 2018.
The case against Two Rivers and all the individuals is currently scheduled for trial starting October 28, 2019. The Company
has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines.
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 Two Rivers pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite (“RCA”)
for services rendered to the former board members at their behest while members of the board. The $139,000 is included in our
accounts payable on the balance sheet. At present, the mater has been settled pending payments by Two Rivers to RCA.
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. A trial has been set for November 2019.
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. The Blue Green note is also
secured by certain water and land property owned by Two Rivers. As a result of Blue Green’s action, the Company has recorded
a contingent liability of $2,359,000, which represents a current appraisal of the assets pledged by the Company.
ITEM
4.
|
MINE
SAFETY DISCLOSURES
|
Not
applicable.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page
16
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2018 and 2017
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.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of September 30,
2018, we own 6,430 gross acres. Gross acres owned decreased from 6,538 gross acres at December 31, 2017 due to the sale of 108
acres.
We
are focused on water assets we have acquired and will potentially 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 our name Two Rivers Water Farming
& Water Company. Our water assets are located in a basin that spans over 1,500 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. 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. As of March 31, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000,
or 29.12%. The reported outstanding shares were provided to the Company by GrowCo’s management.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
9
|
The
Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July
17, 2018 the Company was notified by GrowCo’s management that GrowCo will not provide the requested financial information.
This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under
US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities is no longer
required under US GAAP.
Water
Redevelopment Company
We
formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets
from the rest of our business and to enable additional raising of capital for the purpose of investing in our water assets. Water
Redevelopment Company is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management
and delivery. Water is one of the most basic, core assets. Water Redevelopment’s first area of focus is in the Huerfano-Cucharas
river basin in southeastern Colorado.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company,
TR Capital and its subsidaries: Two Rivers Farms, and Two Rivers Water. All significant inter-company balances and transactions
have been eliminated in consolidation.
Under
guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has
determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement
purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended
June 30, 2018, GrowCo and its related entities were consolidated. Once it was determined to no longer consolidate GrowCo and its
related entities, deconsolidation accounting was performed.
Basis
of Presentation
The
consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis
of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.
Deconsolidation
of GrowCo, Inc.
Even
though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management
has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a
guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been
in contact with Blue Green, the holder of $2,115,000 of the notes to discuss an arrangement whereby GCP1 might use leasing cash
flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that
50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’
Management desires to present a conservative representation of its financial information it has determined to set the probability
of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of
$2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally,
US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under
this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified
in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a.
The aggregate of all of the following:
1.
The fair value of any consideration received. In Two Rivers case, no consideration was received.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
10
|
2.
The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary
is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were no retained noncontrolling investments
in GrowCo or its related entities.
3.
The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income
attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount
of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
Entity
|
|
April
1, 2018
|
|
GrowCo
|
|
|
(1,230,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
5,016,000
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
495,000
|
|
Total
|
|
$
|
8,859,000
|
|
b.
The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With
the above guidance the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which
is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000
from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s
assets.
Investment
in GrowCo Partners 1, LLC (GCP1)
Due
to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted
for under the equity method. As of December 31, 2018, Two Rivers owns 34.56% of GCP1. For the year ended December 31, 2018,
the Company recognized a $115,000 loss which also reduced the Company’s carrying value in its GCP1 investment.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
Entity
|
|
Dec
31, 2018
|
|
|
Dec
31, 2017
|
|
TR
Capital
|
|
$
|
20,342,000
|
|
|
$
|
20,482,000
|
|
HCIC
|
|
|
1,379,000
|
|
|
|
1,388,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
-
|
|
|
|
(850,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
-
|
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
-
|
|
|
|
5,016,000
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
-
|
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
-
|
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
-
|
|
|
|
495,000
|
|
Total
|
|
$
|
22,364,000
|
|
|
$
|
31,752,000
|
|
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
11
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
TR
Capital
|
|
$
|
-
|
|
|
$
|
-
|
|
HCIC
(1)
|
|
|
7,000
|
|
|
|
7,000
|
|
F-1
(2)
|
|
|
-
|
|
|
|
-
|
|
F-2
(2)
|
|
|
-
|
|
|
|
-
|
|
DFP
(2)
|
|
|
-
|
|
|
|
-
|
|
GrowCo
|
|
|
-
|
|
|
|
(644,000
|
)
|
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
|
|
$
|
7,000
|
|
|
$
|
(637,000
|
)
|
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
12
|
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, 2018, and 2017, the Company did not have an allowance for doubtful accounts receivable based on past payment
performance. The Accounts Receivable, Related Party for December 31, 2017, reflects amounts owed from an entity controlled
by our prior CEO.
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. There
was no capitalization of interest during the year ended December 31, 2018.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
13
|
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 property and equipment:
Asset
Type
|
|
Life
in Years
|
|
|
Dec
31, 2018
|
|
|
Dec
31, 2017
|
|
Office
equipment, furniture
|
|
|
5
– 7
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
Computers
|
|
|
3
|
|
|
|
46,000
|
|
|
|
46,000
|
|
Vehicles
|
|
|
5
|
|
|
|
25,000
|
|
|
|
92,000
|
|
Farm
equipment
|
|
|
7
– 10
|
|
|
|
147,000
|
|
|
|
244,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
247,000
|
|
|
|
411,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(227,000
|
)
|
|
|
(251,000
|
)
|
Net
book value
|
|
|
|
|
|
$
|
20,000
|
|
|
$
|
160,000
|
|
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.
The
Company’s land located in El Paso County, Colorado is being partially developed into 35 to 40 acre lots to be sold. For
the year ended December 31, 2018 the Company recognized a gain of $238,000 from approximately $360,000 in land sales.
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
14
|
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.
In
2018 the Company obtained two independent appraisals covering its water assets. The appraisals were in excess of the Company’s
carrying value of it water rights and 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
Effective
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes
revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following
steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue
when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be
reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has
occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably
assured.
There
was no impact on the Company’s financial statements as a result of adopting Topic 606 for the twelve months ended December
31, 2018 and 2017.
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 uncertainty
of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
Farming
The
Company had no revenues from farming for the year ended December 31, 2017. For the year ended December 31, 2018, the Company recognized
approximately $18,000 in net crop share revenues. During 2018, the Company entered into a crop share arrangement for a percentage
of a hemp crop produced on 4 acres of farm land at Butte Valley in Huerfano County, Colorado. A net payment of $18,000 for the
Company’s share was received in the three months ended December 31, 2018.
Other
For
the year ending December 31, 2018, the Company had approximately $48,000 in other revenues from grazing leases and member assessments.
For the year ending December 31, 2017, the Company had approximately $72,000 in other revenues from grazing leases and member
assessments.
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
15
|
Preferred
Dividend payable
Preferred
dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of December
31, 2018 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $33,000.
Beginning
on July 1, 2018, the Company terminated the accrual of the preferred dividends payable to TR Capital preferred members due to
a binding letter of intent executed with an outside strategic partner.
Income
Taxes
The
Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under
this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial
statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are
expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
The
Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized.
In making such a determination, the Company considers all available positive and negative evidence, including future reversals
of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded
amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income
taxes.
The
Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines
whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position
and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of
tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The
Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying
consolidated statement of operations. As of December 31, 2018, no accrued interest or penalties are included on the related tax
liability line in the balance sheet.
Net
Income (Loss) per Share
Basic
net (loss) 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 3,058,500 options, and 17,537,896 warrants at December 31, 2018 and December 31, 2017, have
an exercise price in excess of the Company’s closing price of $0.17/share as of December 28, 2018; therefore these shares
have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive. However,
during the quarter ending March 31, 2019, existing convertible debt was converted into 2,269,198 of the Company’s common
shares. Therefore, these additional shares are added to the basic shares for the nine months ended December 31, 2018.
Recently
Issued Accounting Pronouncements
In
August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820),
“Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”.
The amendments
in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company
is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
16
|
In
March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) –
“Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 118”
. The amendment provides guidance on accounting for the impact of the Tax
Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement
period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes
that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings.
The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back
to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In
February 2018, the FASB issued ASU No. 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income”.
The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income
as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years
beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively
or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated
financial statements.
In
July 2017, the 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. The Company does 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
May 2017, the FASB issued ASU 2017-09,
“Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
,
which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification.
The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not
the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all
entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption
permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The
amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are
effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual
periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective
date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in
the future it may have an impact on its financial statements with the adoption of this new accounting pronouncement.
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 (DFP) AND DECONSOLIDATION (GROWCO)
DFP
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
loss from DFP discontinued operations presented in the statements of operations consist of the following for the year ended December
31, 2018 and December 31, 2017:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
General
and administrative expenses
|
|
|
-
|
|
|
|
(993,000
|
)
|
Depreciation
and amortization
|
|
|
-
|
|
|
|
(1,000
|
)
|
Interest
|
|
|
-
|
|
|
|
(43,000
|
)
|
Other
(gain (loss) on disposal of assets and intangibles)
|
|
|
-
|
|
|
|
(8,000
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
(1,045,000
|
)
|
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
17
|
On
March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds
from 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.
GrowCo
and related entities
According
to ASC 810-10-40-4 Two Rivers shall deconsolidate a subsidiary or derecognize a group of assets as of the date the parent ceases
to have a controlling financial interest in that subsidiary or group of assets. Management determined this date was April 1, 2018
to deconsolidate GrowCo and GrowCo’s related entities.
Further,
a primary beneficiary’s financial statements (i.e., Two Rivers) should reflect the consolidation of a Variable Interest
Entity (“VIE”) for each reporting period until it is not required to consolidate the VIE. That is, upon the occurrence
of a deconsolidation event, it is appropriate for the primary beneficiary to assume the event had occurred in a prior reporting
period to enhance the comparability of financial statements. However, the primary beneficiary should evaluate whether the deconsolidated
entity qualifies for discontinued operations treatment pursuant to ASC 205-20.
Accoring
to ASC 205-20 for disposals other than by sale (e.g., abandonment, distribution or exchange for similar productive assets), the
results of operations of a component of an entity would not be recorded as a discontinued operation until the period in which
the long-lived asset or disposal group is either abandoned, distributed or exchanged, depending on the manner of disposal.
Effective
April 1, 2018, the Company is no longer consolidating the financials of GrowCo and its related entities. The effect of deconsolidation
created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo deconsolidated operations of $810,000;
broken down as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Revenues
|
|
$
|
52,000
|
|
|
$
|
-
|
|
General
and administrative expenses
|
|
|
(89,000
|
)
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
(61,000
|
)
|
|
|
-
|
|
Interest
|
|
|
(1,092,000
|
)
|
|
|
-
|
|
Non-controlling
interest
|
|
|
380,000
|
|
|
|
-
|
|
Total
|
|
$
|
(810,000
|
)
|
|
$
|
-
|
|
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
18
|
Construction
in progress – GrowCo
Due
to the deconsolidation of GrowCo in 2018, the balance in GrowCo’s work in progress was eliminated.
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning
balance
|
|
$
|
3,361,000
|
|
|
$
|
3,520,000
|
|
Additions
|
|
|
-
|
|
|
|
506,000
|
|
Finished
and Transferred
|
|
|
-
|
|
|
|
(665,000
|
)
|
Deconsolidation
of GrowCo
|
|
$
|
(3,361,000
|
)
|
|
|
-
|
|
Ending
Balance
|
|
$
|
-
|
|
|
$
|
3,361,000
|
|
NOTE
5 – NOTES PAYABLE
The
Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value
of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method which, in
this situation, equals a straight-line method.
For the years
ended December 31, 2018 and 2017, the Company recognized an accretion of debt discount of $250,000 and $469,000, respectively.
For
the year ended December 31, 2018 to Company recognized a loss of approximately $248,000 related to debt modification and extinguishment.
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 $6,323,000
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.
Beginning
in the fourth quarter of 2018, and still continuing, the Company is working with a third party interested in assuming the entire
HCIC Seller Carry Back Notes along with all accrued interest. This third party has obtained non-binding letters of interest from
the majority of the current HCIC Seller Carry Back Notes.
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, 2018,
and 2017, the amounts outstanding under the CWCB Loan totaled $690,000 and $748,000, respectively.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
19
|
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, which was subsequently extended to April 1, 2019. 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. As of December
31, 2018 the amount owed was $60,000. This note was paid in full on April 4, 2019.
On
April 4, 2019, the principal and interest was paid in full.
GrowCo
Note
On
September 16, 2016, the Company entered into a note with GrowCo, Inc. based on calculations of amounts due to GrowCo based
on GrowCo overpaying overhead of Two Rivers for GrowCo funds. It was due December 31, 2018. The amount is being disputed by GrowCo
along with the requested interest. The Company has recognized a balance due of $390,000. The note states interest at 6%,
but GrowCo is requesting interest at 22.5%. As of December 31, 2018, the Company has recognize a balance due of $390,000. Management
of Two Rivers and GrowCo are in ongoing discussions to determine the amount owed and the interest rate charged.
Powderhorn/Silverback
Note
During
the three months ended December 31, 2018, the Powderhorn Note was sold to Silverback Securities, by Powderhorn,
with no financial impact on the Company nor changes to the note. The remaining payments on this note was paid through the issuance
of 2,196,154 of the Company’s common shares and recognized a beneficial conversion expense of approximately $12,000.
As of December 31, 2018, the balance is approximately $203,000 and recognized an approximate $248,000 loss due a modification
to the Powderhorn Note. As of March 31, 2019 this note was paid in full.
Morningview
Financial Convertible Note
On
May 4, 2018 the Company entered into a convertible promissory note with Morningview Financial, LLC (“Morningview”)
for $105,000. After November 4, 2018, if the note remains outstanding, Morningview has the right to convert its note at a variable
conversion price which is 60% of the Company’s common shares lowest market price during a prior 15-day trading period. Company
issued 475,452 shares to pay this note and recognized a beneficial conversion expense of approximately $70,000.
As of March 31, 2019, this note was paid in full.
El
Paso Land Notes
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. For the year ended December 31, 2018, approximately $6,000 was paid on these notes. As of December
31, 2018, the balance is approximately $269,000. The stated maturity date is August 1, 2019. Mr. Wayne Harding, the Company’s
CEO, invested $50,000 in these notes.
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. There was no beneficial conversion
expense recognmized. At December 31, 2018, the principle balance was $500,000.
Butte
Valley Land Notes
In
May 2018 the Company enter into a $200,000 note with an existing investor to provide working capital funds. This note is
secured by certain land owned by the Company referred to Butte Valley (located in Huerfano County, Colorado). Under the terms
of this note, 50% of the crop share income payable to the Company from crop share arrangements would be paid to the investor as
a payment toward interest and principle due. The Company received permission from the note holder to not make the crop share
payment in 2018. This note was due on November 11, 2018. The Company is in the process of obtaining an extension to the due date.
As of December 31, 2019, the principla balance was $200,000.
Black
Mountain Note
This
note was entered into on April 26, 2017. It is an original issuance discount note with the face principal amount of $330,000 and
gross cash paid at closing of $300,000. In the three months ended December 31, 2018 this note was paid in full. During the
year ended December 31, 2018, the Company issued 900,000 of its common shares and recorded a loss of approximately $89,000 on
the debt extinguishment.
Investors
Fiduciary LLC
On
July 23, 2018, the Company entered into a convertible promissory note with Investors Fiduciary LLC (and related parties) for a
bridge loan up to $2,000,000. As of December 31, 2018, $551,000 has been drawn on this note. The note carries interest at 20%
per annum and is secured by the Company’s unencumbered 2,456.5 shares in the Huerfano Cucharas Irrigation Company. The holder
has a right to convert principal and any accrued interest into the Company’s common shares at a rate of $0.14/share. On
July 23, 2018, the Company’s common stock closed at $0.117/share. Therefore, the Company did not record a beneficial conversion
feature.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
20
|
Below
is a summary of the Company’s long-term debt:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,323,000
|
|
|
$
|
742,000
|
|
|
$
|
-
|
|
|
$
|
6,301,000
|
|
|
|
6
|
%
|
|
Shares
in the Mutual Ditch Company
|
CWCB
|
|
|
690,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
748,000
|
|
|
|
2.5
|
%
|
|
Certain
Orlando and Farmland assets
|
McFinney
Agri-Finance
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,000
|
|
|
|
6.8
|
%
|
|
2,400
acres of pasture land in Ellicott Colorado
|
GrowCo
note
|
|
|
390,000
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
%
|
|
None
|
GrowCo
$4M notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$1.5M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$6M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,855,000
|
|
|
|
22.5
|
%
|
|
|
GrowCo
$7M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,132,000
|
|
|
|
10-22.5
|
%
|
|
|
GrowCo
$2M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,520,000
|
|
|
|
10-22.5
|
%
|
|
|
Bridge
loan Harding
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,000
|
|
|
|
18
|
%
|
|
Potential
conversion into Ellicott Land security
|
Powderhorn/Silverback
convertible note
|
|
|
203,000
|
|
|
|
2,000
|
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
|
12
|
%
|
|
Third
lien on Ellicott land
|
Morningview
Financial note
|
|
|
75,000
|
|
|
|
7,000
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
18.0
|
%
|
|
Unsecured
|
El
Paso Land notes
|
|
|
271,000
|
|
|
|
56,000
|
|
|
|
-
|
|
|
|
275,000
|
|
|
|
12.0
|
%
|
|
Second
lien on Ellicott land
|
WRC
convertible notes
|
|
|
500,000
|
|
|
|
67,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
12.0
|
%
|
|
Lien
on water supply agreement
|
Butte
Valley Land notes
|
|
|
200,000
|
|
|
|
47,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
%
|
|
Butte
Valley Land
|
Equipment
loans
|
|
|
57,000
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
5
- 8
|
%
|
|
Equipment
|
Black
Mountain
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
12
|
%
|
|
Unsecured
|
Investors
Fiduciary LLC
|
|
|
551,000
|
|
|
|
32,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares
of HCIC
|
Total
|
|
|
9,335,000
|
|
|
$
|
968,000
|
|
|
$
|
(63,000
|
)
|
|
|
19,107,000
|
|
|
|
|
|
|
|
Less:
note discounts
|
|
|
(63,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
Less:
Current portion net of discount
|
|
|
(8,099,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,419,000
|
)
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
1,1
73,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,238,000
|
|
|
|
|
|
|
|
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
21
|
Current
portion long term debt:
|
|
December
31, 2018
|
|
HCIC
seller carry back
|
|
$
|
6,323,000
|
|
CWCB
|
|
|
54
,000
|
|
McFinney
Agri-Finance
|
|
|
60,000
|
|
Harding
Bridge Loan
|
|
|
15,000
|
|
Powderhorn
note
|
|
|
203,000
|
|
Morningview
note
|
|
|
75,000
|
|
GrowCo
note
|
|
|
390
,000
|
|
Investor
Land notes
|
|
|
271,000
|
|
Equipment
loans
|
|
|
20,000
|
|
Butte
Valley Land notes
|
|
|
200,000
|
|
Investors
Fiduciary notes
|
|
|
551,000
|
|
Total
|
|
|
8,162,000
|
|
Less
discount
|
|
|
(63,000
|
)
|
|
|
$
|
8,099,000
|
|
Schedule
of principal payment due by year:
Year
Ending December 31,
|
|
Total
|
|
2019
|
|
$
|
8,162,000
|
|
2020
|
|
|
576
,000
|
|
2021
|
|
|
75
,000
|
|
2022
|
|
|
6
1,000
|
|
2023
& Beyond
|
|
|
461
,000
|
|
Total
|
|
$
|
9,335,000
|
|
NOTE
6 – INFORMATION ON BUSINESS SEGMENTS
We
organize our business segments based on the nature of the products and services offered. Currently, we focus on the Farms
and Water business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by
these lines of businesses: Farms and Water. 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. In
2017, the pior farming operations were discontinued; however, we we continue to report with a Farming Business since
we are expanding our farming business in 2019.
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
22
|
Operating
results for each of the segments of the Company are as follows (in thousands):
|
|
Year
Ended December 31, 2018
|
|
|
Year
Ended December 31, 2017
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-
house
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-
house
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48
|
|
|
$
|
66
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
620
|
|
|
$
|
72
|
|
|
$
|
692
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
33
|
|
Gross
Margin
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
620
|
|
|
|
39
|
|
|
|
659
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
(2,873
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,620
|
)
|
|
|
(6,493
|
)
|
|
|
(752
|
)
|
|
|
-
|
|
|
|
(501
|
)
|
|
|
(8,145
|
)
|
|
|
(9,398
|
)
|
Total
Other Income (Expense)
|
|
|
11,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
10,952
|
|
|
|
(530
|
)
|
|
|
-
|
|
|
|
(2,016
|
)
|
|
|
(368
|
)
|
|
|
(2,914
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
8,615
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,090
|
)
|
|
|
4,525
|
|
|
|
(1,282
|
)
|
|
|
-
|
|
|
|
(1,897
|
)
|
|
|
(8,474
|
)
|
|
|
(11,653
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from Operations
|
|
|
8,615
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,090
|
)
|
|
|
4,525
|
|
|
|
(1,282
|
)
|
|
|
-
|
|
|
|
(1,897
|
)
|
|
|
(8,474
|
)
|
|
|
(11,653
|
)
|
Net
(Loss) from Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(1,045
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,045
|
)
|
Preferred
dividends
|
|
|
(986
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
(1,008
|
)
|
|
|
(369
|
)
|
|
|
-
|
|
|
|
(478
|
)
|
|
|
(16
|
)
|
|
|
(863
|
)
|
Non-controlling
interest
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
644
|
|
|
|
(7
|
)
|
|
|
637
|
|
Net
(Loss)
|
|
$
|
7,636
|
|
|
$
|
-
|
|
|
$
|
(810
|
)
|
|
$
|
(4,112
|
)
|
|
$
|
2,714
|
|
|
$
|
(1,651
|
)
|
|
$
|
(1,045
|
)
|
|
$
|
(1,731
|
)
|
|
$
|
(8,497
|
)
|
|
$
|
(12,924
|
)
|
Segment
Assets
|
|
$
|
10,530
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,129
|
|
|
$
|
30,659
|
|
|
$
|
7
66
|
|
|
$
|
-
|
|
|
$
|
9,433
|
|
|
$
|
27,953
|
|
|
$
|
38,152
|
|
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
23
|
NOTE
7 - EQUITY TRANSACTIONS
Common
Stock
The
Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as
of December 31, 2018, was 45,574,458 common shares.
During
the year ended December 31, 2018, Two Rivers had the following common stock transactions:
|
●
|
874,250
common stock to Black Mountain for a $100,000 in principal reduction in its note payable and the Company recognized a loss
of approximately $29,000.
|
|
●
|
1,090,957
common stock issued to Spotfin Funding for financial services. These shares issued were expensed in the previous year.
|
|
●
|
14,840
common stock issued for a conversion from TR Capital into the Company’s common shares. These shares issued were expensed
in the previous year.
|
|
●
|
118,000
common stock issued for a RSU exercise. The RSU expense was recognized in a previous year.
|
|
●
|
6,800,000
common stock issued for potential equity loans to be made in 2019. Since it is anticipated that the loans will not be fund,
the fair value of the 6,800,000 shares issued upon the closing price at issuance at $0.247/share, $1,632,000 has been expensed.
|
|
●
|
2,196,154
common stock issued
to Powderhorn/Silverback Securities for a partial payment on convertible debt. No loss on conversion was recognized as
converted within the terms of the note agreement. A loss of approximately $248,000 was recognized due to the note modification.
|
|
●
|
900,000
common stock issued to Black Mountain for the final payment of approximately $138,000 on its note payable.
A
loss of approximately $60,000 was recognized.
|
|
●
|
475,452
common stock issued
to Morningview for a principal reduction in its note payable. There was no gain or loss recognized.
|
|
●
|
14,900
common stock issued to three individuals assisting with investor relations. An expense of approximately $2,000 was recognized.
|
|
●
|
200,000
common stock issued to an investor relations firm. An expense of $34,000 was recognized.
|
|
●
|
139,985
common stock issued to an investor for his conversion from TR Capital Partners, LLC. No gain or loss was recognized.
|
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.
|
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, 2018 and 2017.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
24
|
A
summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
December 21, 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
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2018
|
|
|
600,000
|
|
|
$
|
0.70
|
|
Options
Exercisable, December 31, 2018
|
|
|
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 expiration
dates in 2018 and 2019. This extension resulted in $52,000 of expense being recorded in 2017.
For
the year 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
- prior
|
|
|
1,173,215
|
|
|
Various
|
|
Various
|
|
Satisfied
|
|
Various
|
|
$
|
0.53
|
|
|
-
|
|
Employees
|
|
|
131,000
|
|
|
Various
|
|
Various
|
|
Ongoing
|
|
Jun-’26
|
|
$
|
0.53
|
|
|
-
|
|
Others
|
|
|
150,000
|
|
|
Various
|
|
Various
|
|
Satisfied
|
|
Various
|
|
|
Variable
|
|
|
-
|
|
Total
|
|
|
2,279,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
2018
|
|
|
2017
|
|
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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
25
|
A
summary of the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”) is as follows:
|
|
Shares
|
|
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
|
|
|
3,247,540
|
|
Granted
|
|
|
-
|
|
Cancelled
|
|
|
(779,285
|
)
|
Expired
|
|
|
(178,500
|
)
|
Issued/Exercised
|
|
|
-
|
|
Outstanding
December 31, 2018
|
|
|
2,289,755
|
|
Exercisable,
December 31, 2018
|
|
|
1,618,357
|
|
The
option expense from both the 2011 and 2005 Plans were $888,000 and $467,000 for the years ended December 31, 2018 and 2017,
respectively.
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, 2018, 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
|
|
TR
Capital Partners preferred members
|
|
Investors
|
|
|
14,168,944
|
|
|
Jul-05
|
|
Jul-05
|
|
Jan-19
|
|
$
|
2.10
|
|
GrowCo
Exchange Note
|
|
Creditor
|
|
|
700,000
|
|
|
Apr-16
|
|
Apr-16
|
|
May-21
|
|
$
|
0.50
|
|
Wellington
Shields
|
|
Financial
Advisor
|
|
|
15,000
|
|
|
Apr-17
|
|
Apr-17
|
|
Apr-22
|
|
$
|
0.58
|
|
Black
Mountain
|
|
Creditor
|
|
|
390,634
|
|
|
Apr-17
|
|
Apr-17
|
|
Apr-22
|
|
$
|
0.27
|
|
El
Paso Land note holders
|
|
Creditor
|
|
|
275,000
|
|
|
Aug-17
|
|
Aug-17
|
|
Aug-22
|
|
$
|
0.35
|
|
Black
Mountain
|
|
Creditor
|
|
|
146,000
|
|
|
Sep-17
|
|
Sep-17
|
|
Sep-22
|
|
$
|
1.00
|
|
Wellington
Shields (2)
|
|
Financial
Advisor
|
|
|
42,318
|
|
|
Feb-18
|
|
Feb-18
|
|
Feb-23
|
|
$
|
0.32
|
|
Powderhorn
(3)
|
|
Creditor
|
|
|
1,500,000
|
|
|
May-18
|
|
May-18
|
|
May-21
|
|
$
|
0.35
|
|
|
|
|
|
|
17,537,896
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
warrants are priced at the same price per share as the next equity offering and expire one year after the completion of the
next equity offering.
|
|
(2)
|
Wellington
Shield warrants were issued for capital raise assistance. Using a Black Scholes model
the expense was immaterial and not recorded.
|
|
(3)
|
Powderhorn
warrants were part of the loan received from Powderhorn. Using a Black Scholes model
the expense was $229,000 which is amortized over a 3 year period.
|
For
the years ended December 31, 2018 and 2017, warrant expense totaled $50,000 and $331,000, respectively.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
26
|
NOTE
8 – INCOME TAXES
On
December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law.
The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January
1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum
tax on certain future foreign earnings. The impact of the Act decreased the Company’s deferred tax asset related to the
Company’s net operating loss by approximately $6,500,000 and decreased the Company’s valuation allowance by approximately
$6,500,000 resulting in no impact to the Company’s financials.
We
record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result
of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities.
These differences will be reflected as increases or decreases to income tax expense in the period in which new information is
available. As of December 31, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.
Book
loss reconciliation to estimated taxable income is as follows (in thousands):
|
|
|
2018
|
|
|
|
2017
|
|
Book
loss
|
|
$
|
2,714
|
|
|
$
|
(12,924
|
)
|
Tax
adjustments:
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
$
|
1,306
|
|
|
$
|
956
|
|
Stock
compensation exercised
|
|
$
|
32
|
|
|
$
|
-
|
|
Impairments
|
|
$
|
-
|
|
|
$
|
6,900
|
|
Capital
expenses
|
|
$
|
2,964
|
|
|
$
|
2,629
|
|
Meals
& entertainment
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrant
Expense
|
|
$
|
50
|
|
|
$
|
331
|
|
Gain
on deconsolidation of GrowCo
|
|
$
|
(12,773
|
)
|
|
$
|
-
|
|
Loss
on disposal on debt modification
|
|
$
|
336
|
|
|
$
|
-
|
|
Depreciation
|
|
$
|
91
|
|
|
$
|
(617
|
)
|
Amortization
|
|
$
|
|
|
|
$
|
(14
|
)
|
Estimate
of taxable income
|
|
$
|
(5,280
|
)
|
|
$
|
(4,425
|
)
|
We
will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. At
December 31, 2018 and December 31, 2017, we had no unrecognized tax benefits in income tax expense.
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):
|
|
2018
|
|
|
2017
|
|
Current
deferred tax asset:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
(13,124
|
)
|
|
$
|
(18,309
|
)
|
Capital
loss
|
|
|
(6
|
)
|
|
|
(10
|
)
|
Bargain
purchase
|
|
|
417
|
|
|
|
643
|
|
RSU
& stock option expense
|
|
|
(1,835
|
)
|
|
|
(2,349
|
)
|
Fixed
Assets and Intangibles
|
|
|
(212
|
)
|
|
|
(327
|
)
|
Charitable
Contributions
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Bad
Debt
|
|
|
-
|
|
|
|
-
|
|
Total
cumulative deferred tax assets
|
|
|
(14,763
|
)
|
|
|
(18,339
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
14,763
|
|
|
|
18,339
|
|
Effective
income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
tax provision is summarized below (in thousands):
|
|
2018
|
|
|
2017
|
|
Current
expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total
current
|
|
|
-
|
|
|
|
-
|
|
Deferred
expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,992
|
)
|
|
|
(4,600
|
)
|
State
|
|
|
(570
|
)
|
|
|
(414
|
)
|
Total
deferred
|
|
|
(4,562
|
)
|
|
|
(5,014
|
)
|
Less:
Valuation allowance
|
|
|
4,562
|
|
|
|
5,014
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2018 and December 31, 2017, the deferred tax asset of $14,763,000 and $18,384,000, respectively,
has a valuation allowance of $14,763,000 and $18,384,000, 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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
27
|
The
following is a summary of the combined net operating loss carryforward (in thousands):
|
|
Federal
|
|
|
Colorado
|
|
December
31, 2017
|
|
$
|
48,460
|
|
|
$
|
49,460
|
|
December
31, 2018
|
|
|
5,280
|
|
|
|
5,280
|
|
Balance
|
|
$
|
53,740
|
|
|
$
|
54,740
|
|
Future
realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the
existence of sufficient taxable income within the carryforward period. As of December 31, 2018, and 2017, the Company performed
an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both
positive and negative, which included the results of operations for the current and preceding years. The Company also considered
whether there was any currently available information about future years. Because long-term contracts are not a significant
part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating
past results. Moreover, the Company’s earnings are strongly influenced by national economic conditions and have been
volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify
future taxable income. The Company determined that it is more likely than not that all of the deferred tax assets will not
be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2018 and 2017.
The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations
for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain
tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We
recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated
statement of operations. As of December 31, 2018, and 2017, no accrued interest or penalties are included on the related tax liability
line in the consolidated balance sheet.
The
Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business,
the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending
tax examinations. The Company’s tax years are still open under statute from December 31, 2014, to the present. Earlier years
may be examined to the extent that the net operating loss carryforwards from those earlier years are used in future periods. The
resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
NOTE
9 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going oncern. The Company
has not generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately
$12,924,000 during the years ended December 31, 2017. The Company also consumed $1,140,000 in operating activities for its year
ended December 31, 2018. At December 31, 2018, the Company has a working capital deficit and an accumulated deficit of approximately
$20,228,000 and $94,454,000, respectively. The HCIC seller carry back debt and the GrowCo notes are in technical default.
These
factors raise substantial 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, 2018 to March 31, 2019 the Company has collected the following amounts:
|
●
|
$60,000
from Investors Fiduciary;
|
|
●
|
$2,500
from Wayne Harding, and
|
|
●
|
$47,000
from a closing of two lots of our El Paso land properties.
|
We
are in the process of securing additional debt financing on the land and water assets that we own that are unencumbered and from
our potential strategic partners.
Additionally,
we continue to reduced our general and administrative expenses and cash required for our operations.
Management
Plans
The
Company has open discussions with a group of potential strategic investors that include Vaxa, Ekstrak Labs, and Gramz to provide
additional working capital.
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 satisfy 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. There is, however,
no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to
the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
GrowCo
$4M Notes Guaranty
During
the period ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes
have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse and associated
warehouse. The notes pay 22.5% in annual interest, with interest paid monthly, and are due April 1, 2020. GrowCo 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 the past due interest owed to the secured $4M Note holders, these notes are in technical
default.
On
January 19, 2018, Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo 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
requested immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
28
|
Even
though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see
above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a guarantor
of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company
with a recent appraised value of $2,359,000. Since Two Rivers’ Management desires to present a conservative representation
of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent
appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s
investment in GCP1 (ASC 460-10-55-23c).
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. McGrow did not fulfill its sub-lease agreement. In 2018, Two Rivers paid Colorado Center $24,000
as a penalty for early lease termination.
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
|
|
2019
|
|
$
|
28,000
|
|
2020
|
|
$
|
7,000
|
|
2021
|
|
|
-
|
|
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 Chief Executive Officer and Chairman.
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, Mr. Harding
is entitled to an accelerated option vesting.
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 (“RCA”)
for services rendered to the former board members at their behest while members of the board. The Company has agreed to pay $139,000
to RCA on behalf of Channer, Wells and Stroh. 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.
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
29
|
State
of Colorado Litigation
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 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, 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. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation
agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion
for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.
The
State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former
director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two
Rivers to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November
2018. The case against Two Rivers and all the individuals is currently scheduled for trial starting October 28, 2019. The Company
has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines.
NOTE
11 – RELATED PARTY TRANSACTIONS
Pursuant
to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2018, 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:
|
●
|
In
August 2017, Mr. Harding loaned the Company $50,000 in the El Paso Land Notes.
|
|
●
|
On
December 1, 2018, the prior board of directors, Messrs. Harding, Morris, Wiggins, Bragg, Harnish and Cochran, paid, on behalf
of Two Rivers, $44,800 ($6,400 per director) to purchase a tail policy on the prior directors and officers insurance. On December
10, 2018, these amounts were repaid in full including a total of $600 in interest.
|
|
●
|
On
December 10, 2018 Wayne Harding, Company Chief Executive Officer provided a short-term loan to Two Rivers of $2,500. The loan
is secured by the El Paso county land assets of Two Rivers and carried an interest rate of 12%. The note remains outstanding.
|
|
●
|
On
December 17, 2018, Wayne Harding provided a short-term loan to Two Rivers of $15,000. It has the same terms and security as
the December 10, 2018 note. The note remains outstanding.
|
|
●
|
Mr.
Harding loaned the Company $2,500 in January 2018.
|
NOTE
12 – SUBSEQUENT EVENTS
Pursuant
to FASB ASC 855, management has evaluated all events and transactions that occurred from December 31, 2018 through the date
of issuance of these financial statements. During this period, the Company did had the following significant subsequent
events, except as disclosed below.
|
●
|
On
January 30, 2019 the three independent board members were each granted 250,000 options,
with a strike price of $0.13/share, vesting immediately, with a 10-year term.
|
|
●
|
During
the three months ended March 31, 2019, Mr. Wayne Harding was paid $2,500 toward a note payable. Subsequently Mr. Harding loan
an additional $2,500 to the Company.
|
|
●
|
On March 6, 2019, Vaxa provided $60,000 to the Company as an increase to the note payable to Investors Fiduciary
note.
|
|
●
|
The
Company issued the following common shares:
|
|
○
|
3,040,350
common shares to
fully pay the Powderhorn/Silverback note;
|
|
○
|
1,179,817
common shares to fully pay the
Morningview Financial note
|
|
○
|
555,555
to an investor relations firm.
|
|
●
|
On
April 10, 2019, the Company received $100,000 in the form of a note from Investors Fiduciary.
|
Two Rivers Water & Farming Company
|
2018 Financials
|
Page F-
30
|