As
filed with the Securities and Exchange Commission on February 9, 2018.
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
TWO
RIVERS WATER & FARMING COMPANY
(Exact
name of registrant as specified in its charter)
Colorado
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700
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13-4228144
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(State
or other jurisdiction
of
incorporation or organization
)
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(Primary
Standard Industrial
Classification
Code Number)
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|
(I.R.S.
Employer
Identification
Number)
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3025
S. Parker Road, Suite 140
Aurora,
Colorado 80014
(303)
222-1000
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Wayne
Harding
Chief
Executive Officer
Two
Rivers Water & Farming Company
3025
S. Parker Road, Suite 140
Aurora,
Colorado 80014
(303)
222-1000
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
Mark
L. Johnson
K&L
Gates LLP
One
Lincoln Street
Boston,
Massachusetts 02111
Telephone:
(617) 261-3100
Telecopy:
(617) 261-3175
Approximate
date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement is declared
effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box.[ ]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
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Accelerated
filer
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[ ]
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Non-accelerated
filer [ ]
(Do not check if a smaller reporting company)
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Smaller
reporting company
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[X]
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Emerging
growth company
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[ ]
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CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
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Amount
to be Registered
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Proposed
Maximum Offering Price Per Share
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Proposed
Maximum
Aggregate
Offering Price(1)
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Amount
of
Registration
Fee
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Common
stock, $0.001 par value per share(2)
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8,000,000
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(3)
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$
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0.29
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$
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2,320,000
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$
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288.84
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(1)
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Estimated
solely for the purposes of calculating the amount of the registration fee in accordance with Rule 457(c) under the Securities
Act of 1933, as amended, based on the average of the high and low sales price of the registrant’s common stock as reported
on the OTCQB on February 5, 2018.
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(2)
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Pursuant
to Rule 416 under the Securities Act of 1933, as amended, the securities being registered hereunder include such indeterminate
number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends
or similar transactions.
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(3)
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C
onsists
of 8,000,000 shares of Common Stock issuable on conversion of convertible promissory
note held by Powderhorn 1, LP.
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The
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to such Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange
Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject
to Completion, dated February 9, 2018
PRELIMINARY
PROSPECTUS
8,000,000
Shares
Common
Stock
This
prospectus relates to the resale by Powderhorn 1, LP of up to 8,000,000 shares of common stock issuable upon conversion
of a 12.5% original issue discount convertible promissory note we issued in the principal amount of $675,000. We are not selling
any of the shares of common stock under this prospectus and will not receive any proceeds from the sale of these shares.
The
selling shareholders may offer the shares of common stock from time to time through public or private transactions at prevailing
market prices, at prices related to prevailing market prices or at privately negotiated prices. We have agreed to bear all of
the expenses incurred in connection with the registration of these shares. The selling shareholders will pay or assume brokerage
commissions and similar charges, if any, incurred for the sale of the shares. For additional information on the methods of sale
that may be used by the selling shareholders, see “Plan of Distribution” on page 54. The selling shareholders,
and any broker-dealer or agent that is involved in selling resale shares, will be deemed to be an “underwriter” within
the meaning of Section 2(a)(11) of the Securities Act in connection with such sales.
We
may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the
entire prospectus and any amendments or supplements carefully before you make your investment decision.
The
common stock is quoted on the OTCQB under the symbol “TURV.” On February 5, 2018, the closing price of the
common stock as reported on the OTCQB was $0.29. You are urged to obtain current market quotations for the common stock.
Our
business and any investment in the common stock involve significant risks, as described in “Risk Factors” beginning
on page 5 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Prospectus
dated February 9, 2018
Table
of Contents
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
different from, or in addition to, that contained in this prospectus. If anyone provides you with different or inconsistent information,
you should not rely on it. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is
accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of
any sale of common stock. Our business, financial condition, results of operations and prospects may have changed since such date.
Information contained on our website is not a part of this prospectus.
Unless
the context requires otherwise, references in this prospectus to “our company,” “our,” “us,”
“we” and similar terms refer collectively to Two Rivers Water & Farming Company and our subsidiaries.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus. Because the following is only a summary, it does
not contain all of the information you should consider before investing in the common stock. You should carefully read this entire
prospectus, including the risks set forth under “Risk Factors” and the other information included in this prospectus,
before making an investment decision.
Our
Company
Since
2009 we have invested in acquiring and developing irrigated farmland and associated water rights and infrastructure. We seek to
use our land and associated water to create revenue streams. Our business currently consists of two core operations: (1) development
and leasing of our water assets and (2) construction and leasing of greenhouses for cannabis growers.
Water
Since
2009 we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado. We own
a portfolio of water rights in the Arkansas River Basin that we obtained in connection with our purchases of irrigated farmland.
Our water asset area spans over 1,900 square miles and drops in elevation from over 14,000 feet to 4,500 feet at the confluence
of the Arkansas River, east of Pueblo, Colorado. We operate in a natural, gravity-fed water alluvial that is the last undeveloped
basin along the front range of Colorado.
Water
rights can be developed, managed, purchased and sold much like real property, and the seniority of water rights is a significant
consideration when we acquire irrigated farmland. Water rights include the ability to divert stream flow, build a storage reservoir,
pump ground water and create augmentation water supplies to offset depletions of water taken out of priority. Our current water
rights produce a long-term average annual diversion of 15,000 acre-feet of water.
Based
on an investigation conducted by our board of directors, we have identified opportunities to capitalize on water assets that we
currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands
and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the
following within the local communities we serve:
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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, our water assets, both short term and long term.
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We
have identified underutilized land that, along with the water we own, that can be leased to agricultural operators, including
growers of marijuana and hemp.
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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.
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In
February 2017 we formed a subsidiary, Water Redevelopment Company or Water Redev, to separate our water assets from the rest of
our business and to facilitate raising capital solely for our water operations. Water Redev will develop and redevelop infrastructure
for water management and delivery. As its first project, Water Redev plans to fully develop the Huerfano-Cucharas river basin
in southeastern Colorado in order to manage the water contained therein for the benefit of our investors and our local community.
Greenhouses
With
the legalization of recreational marijuana usage in Colorado in 2012, we identified the potential use of some of our farmland
for lease to licensed marijuana growers. Presently over 80% of Colorado marijuana is grown in converted warehouses. Sophisticated
growers understand that a warehouse production facility is not ideal for cannabis production. This has given rise to a strong
demand for the use of greenhouse space for marijuana production. Early estimates show a greenhouse can produce at least twice
the amount of product at less than 50% of the cost compared to warehouse production. However, there are only a limited number
of counties in Colorado that allow for new greenhouse construction. Additionally, new construction of greenhouses needs to be
tied to water supply. Pueblo County, where the majority of our land and associated water rights are located, allows for the lease
of new greenhouse construction to marijuana growers.
In
May 2014 we formed a subsidiary, GrowCo, Inc. or GrowCo, to conduct our efforts to take advantage of the rapidly growing demand
for marijuana, both medical and recreational, within the State of Colorado. GrowCo constructs state-of-the-art computer-controlled
greenhouses for leasing to licensed marijuana growers and provides support and administrative services to those tenants. It is
not, and will not be, a licensed marijuana grower or retailer. GrowCo currently operates in Colorado, but intends to expand its
operations into other states.
Corporate
Information
We
were incorporated under the laws of the State of Colorado in December 2002. Our headquarters are located at 3025 S. Parker Road,
Suite 140, Aurora, Colorado 80014, where our telephone number is (303) 222-1000. Our website address is
www.2riverswater.com
.
The information contained on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.
We have included our website address in this prospectus solely as an inactive textual reference.
Issuance
of Convertible Promissory Note
On
February 9, 2018, we entered into a securities purchase agreement, or the SPA, with Powderhorn 1, LP (“Powderhorn”),
pursuant to which we issued to Powderhorn a 12.5% original issue discount convertible promissory note, or the Note, in the principal
amount of $675,000 in exchange for $600,000 in cash.
We have filed the registration
statement of which this prospectus is a part in order to register the resale of (a) up to 8,000,000 shares of common stock by
Powderhorn that may be issued upon conversion of the Note. Under the SPA, we have agreed to use our reasonable best efforts to
have the registration statement declared effective by the Securities and Exchange Commission by April 11, 2018.
Subject to certain permitted exceptions, if we fail to meet the filing deadline or to keep the registration statement effective,
we will be required to pay liquidated damages to Powderhorn.
The
Note, which is due on February 9, 2019, bears interest at the rate of 12.5% per annum. All principal of, and accrued interest
on, the Note is convertible at any time, at Powderhorn’s election, into shares of common stock at a conversion price
equal to $0.29. We have the right to prepay all or any portion of the Note at any time upon ten days’ written notice to
Powderhorn. For the purpose of securing our obligations under the Note, TR El Paso Land, LLC, our wholly owned subsidiary,
granted a deed of trust conveying certain property to Powderhorn and a limited recourse guarantee in favor of Powderhorn.
The Note contains customary default events that, if triggered and not timely cured, will result in default interest and penalties.
The
foregoing summary descriptions of the SPA and the Note do not purport to be complete and are qualified in their entirety by reference
to the full text of the SPA and the Note, each of which is filed as an exhibit to the registration statement of which this prospectus
is a part and incorporated by reference herein.
There are substantial
risks to investors as a result of our issuance of shares of common stock under the Note. Resales by Powderhorn of shares
issued upon conversion of the Note may cause dilution to existing shareholders and may result in a significant decrease in the
market price of the common stock. See “Risk Factors—Our issuance of common stock upon conversion of the Note may result
in significant decreases in our stock price and in dilution to existing shareholders.”
Risks
Related to Our Business
Our
business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely
affect our business, financial condition, results of operations, cash flows or prospects. These risks are discussed more fully
in “Risk Factors” beginning on page 5. Before making a decision to invest in our common stock, you should carefully
consider all of those risks, including the following:
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We
have incurred significant losses since our inception, have an accumulated deficit of over $87.4 million as of September 30,
2017, have generated limited revenue to date, and we may not be able to attain profitability.
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Based
on the limited operating history of our water assets, the operating performance and our business strategy relating to our
water assets are not yet proven and you may have difficulty evaluating our ability to achieve our objectives.
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One
segment of our business is dependent on demand for marijuana, which remains illegal under federal law. Recent changes in the
enforcement priorities of the federal government could render our current and planned future operations unprofitable or even
prohibit such operations.
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We
will need additional capital in the future to finance our operations, which we may not be able to raise or it may only be
available on terms unfavorable to us or our stockholders, which may result in our inability to fund our working capital requirements
and harm our operational results.
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Our
success is particularly dependent upon Wayne Harding, our sole executive officer, and the loss of Mr. Harding would significantly
disrupt operations and would have a material adverse effect on our business.
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Offering
This
prospectus relates to the resale from time to time by the selling stockholders identified herein of up to 8,000,000 shares of
our common stock. We are not offering any shares for sale under the registration statement of which this prospectus is a part.
Common
stock offered by selling shareholders
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Up
to 8,000,000 shares(1)
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Common
stock outstanding prior to this offering
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32,937,045
shares(2)
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Common
stock outstanding after this offering
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40,937,045
shares
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Use
of proceeds
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We
will not receive any proceeds from the sale of shares in this offering.
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OTCQB
symbol
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TURV
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(1)
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Includes
(a) up to 8,000,000 shares of common stock issuable to Powderhorn upon conversion
of the Note.
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(2)
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Excludes
(a) 10,000,000 shares of common stock reserved for issuance under our 2005 Option Plan and 2011 Long-Term Stock Incentive
Plan including (b) restricted stock units covering 133,000 shares of common stock.
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Summary
Consolidated Financial Information
The
following tables summarize our consolidated financial data. You should read the following data in conjunction with “Selected
Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our consolidated financial statements and related notes included at the end of this prospectus.
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Years
Ended
December
31,
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Nine
Months Ended
September
30,
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2016
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2015
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2017
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2016
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(in
thousands, except share and per share data)
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Consolidated
Statement of Operations Data:
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Revenue
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Leasing
─Greenhouse (related party)
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$
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204
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947
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$
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2,865
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$
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25
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Other
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68
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78
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40
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40
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Total
revenue
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272
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1,025
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2,905
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65
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Cost
of lease revenue
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─
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203
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─
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─
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Gross
profit
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272
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822
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2,905
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65
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Operating
expenses:
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General
and administrative
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3,711
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2,051
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1,201
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2,717
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Depreciation
and amortization
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166
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173
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343
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152
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Total
operating expenses
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3,877
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2,224
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1,544
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2,869
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Profit
(loss) from operations
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(3,605
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)
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(1,402
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)
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1,361
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(2,804
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)
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Other
income (expense)
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Interest
expense
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(1,780
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)
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(1,325
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)
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(1,905
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)
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(1,262
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)
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Warrant
and options expense
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(327
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)
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(86
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)
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(93
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)
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─
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Gain
on disposal of assets
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─
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─
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9
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─
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Other
income
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17
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98
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9
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47
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Total
other income (expense)
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(2,090
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)
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(1,313
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)
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(1,980
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)
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(1,215
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)
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Net
loss from continuing operations before taxes
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(5,695
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)
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(2,715
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)
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(619
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)
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(4,019
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)
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Net
loss from discontinued operations
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(2,624
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)
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(1,025
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)
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(1,174
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)
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(316
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)
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Net
loss
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(8,319
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)
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(3,740
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)
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(1,793
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)
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(4,335
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)
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Net
loss (income) attributable to noncontrolling interest
|
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200
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|
|
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(6
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)
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538
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|
|
|
(7
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)
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Net
loss
|
|
|
(8,119
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)
|
|
|
(3,746
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)
|
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|
(1,255
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)
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|
(4,342
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)
|
Preferred
shareholder distributions
|
|
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(2,608
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)
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(2,411
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)
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(1,880
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)
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(1,938
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)
|
Net
loss attributable to common shareholders
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|
$
|
(10,727
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)
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|
$
|
(6,157
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)
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|
$
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(3,135
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)
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|
$
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(6,280
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)
|
Loss
per common share─basic and dilutive
|
|
$
|
(0.38
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)
|
|
$
|
(0.22
|
)
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|
$
|
(0.10
|
)
|
|
$
|
(0.22
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)
|
Weighted
average shares outstanding─basic and dilutive
|
|
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28,147
|
|
|
|
26,782
|
|
|
|
31,571
|
|
|
|
27,957
|
|
|
|
As
of
September
30, 2017
|
|
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(in
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102
|
|
Working
capital(1)
|
|
|
(19,370
|
)
|
Preferred
dividend payable
|
|
|
4,984
|
|
Total
assets
|
|
|
47,481
|
|
Total
indebtedness
|
|
|
18,428
|
|
Total
liabilities
|
|
|
26,248
|
|
Total
stockholders’ equity
|
|
|
21,233
|
|
|
(1)
|
Working
capital is calculated as current assets less current liabilities.
|
RISK
FACTORS
Investing
in the common stock involves a high degree of risk. Before you decide to invest in the common stock, you should carefully consider
the risk described below. The following risks are not the only ones facing our company. Additional risks and uncertainties may
also impair our business operations. If any of the risks described occurs, our business, financial condition, results of operations
and future growth prospects could be harmed. In these circumstances, the market price of the common stock could decline, and you
may lose all or part of your investment.
Risks
Related to Our Business and Our Industry
We
can give no assurance of success or profitability to investors.
There
is no assurance that we will generate revenues or profits. We have not been profitable in the past and had an accumulated deficit
of $87.4 million as of September 30, 2017. We incurred net losses from continuing operations before taxes (excluding results
from discontinued operations) of $5.7 million in 2016 and $619,000 during the nine months ended September 30, 2017.
Our
success will depend, to a large degree, on the expertise and experience of our sole executive officer.
Effective
January 17, 2018, the board of directors appointed Wayne Harding, our chief executive officer, to also serve as our interim
chief financial officer. Mr. Harding is our sole executive officer. Our success in identifying investment opportunities and pursuing
and managing such investments will be, to a large degree, dependent upon Mr. Harding’s expertise and experience and his
ability to attract and retain quality personnel. We do not maintain a key person life insurance policy on Mr. Harding. The loss
of Mr. Harding would significantly delay or prevent the achievement of our business objectives. If Mr. Harding is unable or unwilling
to continue his employment with us, we may not be able to replace him in a timely manner and we will have no executive personnel
with experience operating our company. We may incur additional expenses to recruit and retain qualified replacements.
Our
current management resources may not be sufficient for the future, and we have no assurance that we can attract additional qualified
personnel.
There
can be no assurance that the current level of management is sufficient to perform all responsibilities necessary or beneficial
for management to perform. Our success in attracting additional qualified personnel will depend on many factors, including our
ability to provide them with competitive compensation arrangements, equity participation and other benefits. There is no assurance
that we will be successful in attracting highly qualified individuals in key management positions.
Any
default on mortgages relating to our water and greenhouse development could have a material impact on our farming business.
Our
water rights and facilities owned by our subsidiary GrowCo, Inc., or GrowCo, are subject to mortgages. If we default on a mortgage,
we could lose the underlying assets.
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. Our greenhouse business in particular
is subject to numerous federal laws that are in conflict with the state of Colorado and local regulations, and a significant change
in enforcement of federal laws could have a material adverse effect on our ability of our tenants to operate the greenhouses and
litigation costs and results of operations. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot
accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have a material adverse impact on
our business, financial condition, and results of operations. In addition, regardless of the outcome of any litigation or regulatory
proceedings, these proceedings could result in substantial costs and may require that we devote substantial resources to defend
our company. Further, changes in governmental regulations where we operate could have adverse effects on our business and subject
us to additional regulatory actions. 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.
We
may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations
or orders applicable to our water businesses.
Regulatory
agencies may also change their rules and policies, which may adversely affect our profitability and cash flows. We may also be
subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders
applicable to our water businesses. The water rights we control provide significant legal and pecuniary benefits. Any change in
Colorado law that affects water rights, either in general or specific to our company, could likely have a material impact on us.
We
operate in a highly competitive industry and potential competitors could duplicate our business model.
We
are involved in a highly competitive industry where we compete with numerous other companies who offer similar facilities to lease
to those we offer. There is no aspect of our business, which is protected by patents, copyrights, trademarks, or trade names.
As a result, potential competitors could duplicate our business model with little effort. Some of our potential competitors may
have significantly greater resources than we have, which may make it difficult for us to compete. There can be no assurance that
we will be able to successfully compete against these other entities.
Our
operations are geographically concentrated within Colorado.
Our
operations are concentrated in Southeastern Colorado. As a result, our financial results are subject to political impacts, regional
weather conditions, available water supply, available labor supply, utility cost, regulatory risks, economic conditions and other
factors affecting Colorado, our area of operation. Southeastern Colorado has been hard hit by the on-going economic crisis. Colorado
is raising taxes in order to balance the state budget and jobs may be lost to other states which are perceived as having a more
business friendly climate, thereby exacerbating the impact of the financial crisis in Colorado.
We
have substantial competitors who have an advantage over us in resources and management.
Most
of our competitors in the water resource management business have significantly greater financial resources, technical expertise
and managerial capabilities than us and, consequently, we may be at a competitive disadvantage in identifying and developing or
exploring suitable business opportunities and/or acquisitions. Competitors’ resources could overwhelm our restricted efforts
and adversely impact our operational performance.
The
inability to attract and retain qualified employees could significantly harm our business.
The
market for skilled executive officers and employees knowledgeable in water rights is highly competitive and historically has experienced
a high rate of turnover. Competition for quality officers and employees may lead to increased hiring and retention costs.
Additional
Risk Factors Relating to Our Greenhouse Business
Our
proposed greenhouse leasing business is dependent on state laws pertaining to the marijuana industry.
Continued
marijuana industry operations are dependent upon continued legislative authorization of marijuana at the state level. Any number
of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there is public
support for legislative support of marijuana laws, numerous factors could impact the legislative process. As of December 31, 2017,
29 states, the District of Columbia, Guam and Puerto Rico allowed their residents to use medical marijuana and voters in the States
of Colorado, Washington, Oregon, Alaska, California, Nevada, Maine, Massachusetts and the District of Columbia had approved and
implemented regulations to legalize cannabis for recreational adult use. The state laws are in conflict with the Federal Controlled
Substances Act, which makes marijuana use and possession illegal on a national level. More stringent enforcement of Federal law,
as described below under “—Marijuana remains illegal under federal law,” could cause the greenhouse leases to
be terminated, or even to be confiscated by the Federal government. If the greenhouses can no longer be used for marijuana production,
we plan to use the greenhouses for production of organic fruit and vegetables. This potential change of use would significantly
reduce the return of the capital invested in the greenhouses.
Marijuana
remains illegal under federal law.
Despite
the development of a legal marijuana industry under the laws of certain states, these state laws legalizing medical and adult
cannabis use are in conflict with the Federal Controlled Substances Act, which classifies marijuana as a Schedule-I controlled
substance and makes marijuana use and possession illegal on a national level. The United States Supreme Court has ruled that it
is the federal government that has the right to regulate and criminalize marijuana, even for medical purposes, and thus federal
law criminalizing the use of marijuana preempts state laws that legalize its use. On January 4, 2018, U.S. Attorney General Jeff
Sessions issued a written memorandum rescinding previous federal guidance to the effect that it was not an efficient use of resources
to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution
of medical marijuana. The memorandum redirected U.S. prosecutors to enforce the Federal Controlled Substances Act. It is unclear
at this time how strongly the federal law will be enforced and which activities will be targeted for enforcement. This significant
change in the Federal government’s enforcement policy may cause financial damage to our operations.
We
may be unable to develop the properties that are critical to our greenhouse business.
Our
business plan involves the acquisition and development of real estate properties and support services. These properties will be
used for our traditional irrigated farming business and the development of greenhouses, which will be leased to participants in
the marijuana industry. The zoning and operational restrictions on marijuana industry participants may limit the availability
of properties suitable for greenhouse development. While we have our Colorado property zoned for cannabis greenhouse production,
this zoning can be revoked if construction has not begun. Further, we may be unable to find suitable properties once we expand
outside of Colorado.
We
may be unable to expand successfully into new markets.
We
intend to aggressively pursue our greenhouse development to lease to licensed marijuana growers for the foreseeable future. This
expansion into new markets, particularly in states where we do not currently operate, may not succeed. This expansion may expose
us to new operational, regulatory or legal risks. In addition, expanding into new states may subject us to unfamiliar or uncertain
local regulations that may adversely affect our operations, for example, by applying, obtaining and/or maintaining appropriate
licenses. Facilities we open in new markets may also take longer to reach expected revenue and profit levels on a consistent basis
and may have higher construction, occupancy or operating costs than facilities we open in existing markets, thereby affecting
our overall profitability. New markets may have competitive conditions, consumer preferences and spending patterns that are more
difficult to predict or satisfy than our existing markets.
The
leasing market for marijuana lessees could be volatile.
We
have signed ten-year leases with Johnny Cannaseed, a related party. There is no guarantee that these leases will be renewed or
at what rate. The current lease rates are $20 per square foot, triple net. The development and construction cost for a
105,000 square foot greenhouse and facilities are approximately $65 per square foot. Even though we capture all of our costs before
the ten year leases expire, new lease rates may be substantially lower, thereby decreasing our returns.
We
currently have only one tenant for our greenhouse, including additional new greenhouses.
We
are reliant on one tenant for our greenhouses, who subsequently has sub-leased space to licensed growers. It is our plan to lease
our additional Colorado greenhouses to the same tenant. If the tenant cannot make lease payments, for whatever reason, we may
not be able to replace the existing tenant in a timely period, or at all. We are in the process of working directly with the
subtenant of Johnny Cannaseed and expect to have a direct leasing relationship with this tenant in the near future.
Our
greenhouse lessees may not be able to fund lease and service payments.
If
GrowCo’s tenants incur unforeseen weather, negative crop events, or a major reduction of the price of marijuana, the tenant
may not be able to pay lease and service payments. This will cause a legal action to the eviction of the tenant and a search for
a new tenant, which may not be successful.
Our
future success depends on our ability to attract new greenhouse lessees.
Our
immediate plan is to construct additional greenhouses on a 160-acre plat. There is no assurance that our existing tenant will
lease the additional greenhouses or that we can attract new tenants.
Our
failure to obtain capital may significantly restrict our proposed greenhouse operations.
We
need capital to fund our greenhouse expansion. While we have been successful in accessing capital for the first greenhouse, we
do not know if future capital raising will be successful. Our failure to obtain the capital, which we require for greenhouse expansion,
may result in the slower implementation of our GrowCo business plan.
Tenants
of GrowCo may have difficulty accessing the service of banks, which may make it difficult for them to operate and remit payments.
Since
the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with
marijuana. Consequently, businesses involved in the marijuana industry often have trouble finding a bank willing to accept their
business. The inability to open bank accounts may make it difficult for potential tenants of GrowCo to operate. There may also
be an issue with GrowCo’s ability to deposit payments from its tenants.
Laws
and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect our greenhouse
leasing operations.
Local,
state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could
require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these
laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.
Furthermore, it is possible that regulations may be enacted in the future that will be directly applicable to our leasing activities.
We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
We
have leased our first greenhouse to a related party, which may result in actual or perceived conflicts of interest that could
harm our operating results and reduce our stock price.
GCP
1, LLC, a subsidiary of TR Capital Partners, LLC, leases our only currently operating greenhouse and warehouse to Johnny Cannaseed,
LLC pursuant to a lease agreement dated August 4, 2016. Johnny Cannaseed is owned predominantly by John McKowen, our former chief
executive officer. In light of Mr. McKowen’s significant stockholdings in both Two Rivers Water & Farming and GrowCo,
we determined that he should be regarded as a related party and that transactions with Johnny Cannaseed and his new services company
should be classified as related party transactions for financial statement reporting purposes. We are in the process of working
directly with the subtenant of Johnny Cannaseed and expect to have a direct leasing relationship with this tenant in the near
future.
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 February 9,
2018, 32,937,045 shares of common stock were outstanding. A total of up to 8,000,000 shares of common stock, all of which may
be offered from time to time pursuant to this prospectus, may be issued upon conversion of a 12.5% original issue discount convertible
promissory note we issued on February •, 2018 to Powderhorn, LLC, one of the selling shareholders. If holders convert their
TR Capital Partners, LLC preferred units into shares of common stock, we would issue up to an additional 29,933,788 shares of
common stock and warrants to acquire an additional 14,106,667 shares of common stock at $2.10 per share. In addition, as of February
9, 2018, there were outstanding options to acquire 5,917,315 shares of common stock and restricted stock units, or RSUs, covering
133,000 shares of common stock. As a result, there may be a substantial dilution to our existing shareholders.
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.
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.
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.
Our
stock is thinly traded and as a result shareholders may be unable to sell at or near ask prices or at all.
Shares
of common stock are thinly traded on the OTCQB market, meaning that the number of persons interested in purchasing common stock
at or near ask prices at any given time may be relatively small. This situation is attributable to a number of factors, including
the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume and that even if we came to the attention of such persons,
they may be risk-averse and reluctant to follow an early stage company or purchase or recommend the purchase of any of our securities
until such time as we became more seasoned and profitable. As a consequence, there may be periods of several days or more when
trading activity in our securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume
of trading activity that will generally support continuous sales without an adverse effect its securities price. We cannot give
you any assurance that a broader or more active public trading market for our common securities will be developed or sustained.
Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices
or at all if they desire to liquidate shares of common stock.
FORWARD-LOOKING
STATEMENTS
This
prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements
of historical facts, contained in this prospectus, including statements regarding our strategy, future operations, future financial
position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth, are forward-looking
statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “target,” “would” and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words. In addition, statements following the
words “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. The forward-looking
statements and opinions contained in this prospectus are based upon information available to us as of the date such statements
are made and, while we believe such information forms a reasonable basis for such statements at the time made, such information
may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into,
or review of, all potentially available relevant information. These forward-looking statements include, among other things, statements
about:
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the
anticipated trends and challenges in our business;
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our
potential market opportunities and anticipated growth strategies;
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regulatory
developments in Colorado and the United States generally; and
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other
risks and uncertainties, including those referenced in “Risk Factors” above.
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We
may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not
place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements we make. New risks and uncertainties emerge from time to time, and
it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained
in this prospectus. We have included important factors in the cautionary statements in this prospectus, particularly in “Risk
Factors,” that could cause actual results or events to differ materially from our forward-looking statements. Our forward-looking
statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures
or investments that we may make or enter into.
You
should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus
is a part completely and with the understanding that our actual future results may be materially different from what we expect.
We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events
or otherwise, except as required by law.
USE
OF PROCEEDS
We
are filing the registration statement of which this prospectus is a part to permit Powderhorn, LLC to resell shares of
common stock acquired from us as described in “Principal and Selling Shareholders.” We are not selling any shares
of common stock under this prospectus, and we will not receive any proceeds from the sales of shares by the selling shareholders.
We have, however, received proceeds from our sale of the 12.5% original issue discount convertible promissory note to Powderhorn,
which proceeds will be used for working capital and other general corporate purposes.
Each
of the selling shareholders will pay any underwriting discounts and commissions and expenses it incurs for brokerage, accounting,
tax or legal services or any other expenses it incurs in disposing of the shares covered by this prospectus. We will bear all
other costs, fees and expenses incurred in effecting the registration of the shares, including all registration and filing fees
and fees and expenses of our counsel and accountants.
DIVIDEND
POLICY
We
have never declared or paid cash dividends on the common stock. We currently intend to retain all of our future earnings, if any,
to finance the growth and development of our business. We do not intend to pay cash dividends in respect of the common stock in
the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors
and will depend on restrictions and other factors our board of directors may deem relevant, including our ability to generate
positive cash flows from operations. Investors should not purchase the common stock with the expectation of receiving cash dividends.
PRICE
RANGE OF COMMON STOCK
Our
common stock is traded on the OTCQB, an over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry
Regulatory Authority, or FINRA. Prior to that, there was no public market for the common stock. The common stock began trading
on the OTC Bulletin Board on September 17, 2007 under the symbol “NVDF”. In connection with a change in our corporate
name, the common stock began trading under the symbol “TURV” on October 13, 2010. As a result of changes in the over-the-counter
market, on October 13, 2010, the common stock began trading on the OTCQB under the symbol “TURV”.
The
following table sets forth the range of high and low bid quotations for the common stock during the periods indicated. The quotations
were obtained from information published by FINRA and reflect inter-dealer prices, without retail mark-up, mark-down or commission
and do not necessarily represent actual transactions.
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High
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Low
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2018
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First
quarter (through February 5, 2018)
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$
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0.53
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$
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0.29
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2017
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Fourth
quarter
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$
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0.58
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$
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0.27
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Third
quarter
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0.88
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0.23
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Second
quarter
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0.64
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0.30
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First
quarter
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0.81
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0.51
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2016
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Fourth
quarter
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$
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1.02
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$
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0.32
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Third
quarter
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0.53
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0.15
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Second
quarter
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0.56
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0.26
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First
quarter
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0.73
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0.38
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The
last sale price of common stock on February 7, 2018 on the OTCQB market was $0.29 per share. As of January 26,
2018, there were 453 holders of record. We estimate that there are approximately 5,130 beneficial shareholders. In many instances,
a registered shareholder is a broker or other entity holding shares in street name for one or more customers who beneficially
own the shares.
Penny
Stock Regulation
Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by
the SEC. Penny stocks generally are equity securities with a price of less than $5.00. Excluded from the penny stock designation
are securities listed on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information
with respect to transactions in such securities is provided by the exchange/system or sold to established customers or accredited
investors.
The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver
a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in connection with the transaction, and the monthly account statements showing the market
value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior
to a transaction in a penny stock, the broker-dealer must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These
disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for common stock,
and investors therefore may find it more difficult to sell their common stock.
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
The
following tables set forth selected consolidated financial data. We derived the consolidated statement of operations data for
the years ended December 31, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2015 and 2016 from our consolidated
financial statements audited by Eide Bailly LLP. We derived the consolidated statement of operations data for the nine months
ended September 30, 2015 and 2016 and the consolidated balance sheet data as of September 30, 2016 from our unaudited consolidated
financial statements included at the end of this prospectus. The unaudited consolidated financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the
results of operations for those periods. Our historical results are not necessarily indicative of the results to be expected for
any future period, and the results in the nine months ended September 30, 2017 are not necessarily indicative of results to be
expected for the full year or any other period. The following should be read in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes
included at the end of this prospectus.
On
November 28, 2017, we were notified by Eide Bailly LLP of its decision to resign as our independent registered public accounting
firm. On December 1, 2017, the audit committee of our board of directors approved the engagement of M&K CPAS, PLLC, or M&K,
as our independent registered public accounting firm for the year ended December 31, 2017.
|
|
Years
Ended
December
31,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
|
(in
thousands, except share and per share data)
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing
─Greenhouse (related party)
|
|
$
|
204
|
|
|
|
947
|
|
|
$
|
2,865
|
|
|
$
|
25
|
|
Other
|
|
|
68
|
|
|
|
78
|
|
|
|
40
|
|
|
|
40
|
|
Total
revenue
|
|
|
272
|
|
|
|
1,025
|
|
|
|
2,905
|
|
|
|
65
|
|
Cost
of lease revenue
|
|
|
─
|
|
|
|
203
|
|
|
|
─
|
|
|
|
─
|
|
Gross
profit
|
|
|
272
|
|
|
|
822
|
|
|
|
2,905
|
|
|
|
65
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,711
|
|
|
|
2,051
|
|
|
|
1,201
|
|
|
|
2,717
|
|
Depreciation
and amortization
|
|
|
166
|
|
|
|
173
|
|
|
|
343
|
|
|
|
152
|
|
Total
operating expenses
|
|
|
3,877
|
|
|
|
2,224
|
|
|
|
1,544
|
|
|
|
2,869
|
|
Profit
(loss) from operations
|
|
|
(3,605
|
)
|
|
|
(1,402
|
)
|
|
|
1,361
|
|
|
|
(2,804
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,780
|
)
|
|
|
(1,325
|
)
|
|
|
(1,905
|
)
|
|
|
(1,262
|
)
|
Warrant
and options expense
|
|
|
(327
|
)
|
|
|
(86
|
)
|
|
|
(93
|
)
|
|
|
─
|
|
Gain
on disposal of assets
|
|
|
─
|
|
|
|
─
|
|
|
|
9
|
|
|
|
─
|
|
Other
income
|
|
|
17
|
|
|
|
98
|
|
|
|
9
|
|
|
|
47
|
|
Total
other income (expense)
|
|
|
(2,090
|
)
|
|
|
(1,313
|
)
|
|
|
(1,980
|
)
|
|
|
(1,215
|
)
|
Net
loss from continuing operations before taxes
|
|
|
(5,695
|
)
|
|
|
(2,715
|
)
|
|
|
(619
|
)
|
|
|
(4,019
|
)
|
Net
loss from discontinued operations
|
|
|
(2,624
|
)
|
|
|
(1,025
|
)
|
|
|
(1,174
|
)
|
|
|
(316
|
)
|
Net
loss
|
|
|
(8,319
|
)
|
|
|
(3,740
|
)
|
|
|
(1,793
|
)
|
|
|
(4,335
|
)
|
Net
loss (income) attributable to noncontrolling interest
|
|
|
200
|
|
|
|
(6
|
)
|
|
|
538
|
|
|
|
(7
|
)
|
Net
loss
|
|
|
(8,119
|
)
|
|
|
(3,746
|
)
|
|
|
(1,255
|
)
|
|
|
(4,342
|
)
|
Preferred
shareholder distributions
|
|
|
(2,608
|
)
|
|
|
(2,411
|
)
|
|
|
(1,880
|
)
|
|
|
(1,938
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(10,727
|
)
|
|
$
|
(6,157
|
)
|
|
$
|
(3,135
|
)
|
|
$
|
(6,280
|
)
|
Loss
per common share─basic and dilutive
|
|
$
|
(0.38
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.22
|
)
|
Weighted
average shares outstanding─basic and dilutive
|
|
|
28,147
|
|
|
|
26,782
|
|
|
|
31,571
|
|
|
|
27,957
|
|
|
|
As
of
September 30, 2017
|
|
|
|
(in
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102
|
|
Working capital(1)
|
|
|
(19,370
|
)
|
Preferred
dividend payable
|
|
|
4,984
|
|
Total
assets
|
|
|
47,481
|
|
Total
indebtedness
|
|
|
18,428
|
|
Total
liabilities
|
|
|
26,248
|
|
Total
stockholders’ equity
|
|
|
21,233
|
|
|
(1)
|
Working
capital is calculated as current assets less current liabilities.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
We
have two core businesses: developing greenhouses to lease to cannabis growers and water.
Greenhouse
Development and Leasing
We
seek to use our farmland and associated water to create revenue streams. In the past, we had focused on converting, through our
Farms operations, farmland and associated water rights to higher-yield, revenue and margin crops. With the legalization of recreational
use of marijuana in Colorado in 2012, we identified the potential use of certain of our farmland for lease to licensed marijuana
growers. In May 2014, we formed GrowCo, Inc., or GrowCo, to focus and lead our efforts to take advantage of the rapidly growing
demand for marijuana. GrowCo initially issued 20,000,000 shares of its common stock to us, and in August 2014 we announced that
we were reserving 10,000,000 of those 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 covering GrowCo common shares has been
filed and declared effective, which has not yet occurred.
In
2014, we formed our subsidiary, GrowCo, Inc., or GrowCo. GrowCo’s focus is to become the number one provider of greenhouses,
related infrastructure, and services to growers of cannabis, in states where such activity is legal.
|
●
|
In
January 2015, GrowCo Partners 1, LLC or GCP1, began fund raising and construction planning activities for the first greenhouse
project. The GCP1 greenhouse consists of a 90,000 square foot greenhouse (plus a 1,000 square feet boiler/mechanical room)
and a 15,000 square foot processing and warehouse facility on 40 acres of land. Our construction costs for the GCP1 greenhouse
totaled $5.3 million. The GCP1 greenhouse was leased to Suncanna, LLC, or Suncanna, with lease payments scheduled to commence
as of September 1, 2016. As of December 31, 2015, we had recorded lease receivables of $700,000 and deferred rent of $43,400
in connection with the Suncanna lease arrangements. In 2016, the Suncanna lease arrangement has been the subject of administrative
and judicial proceedings:
|
|
|
|
|
|
|
–
|
On
April 14, 2016, we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing, which was set for November 14, 2016.
|
|
|
|
|
|
|
–
|
Due
to the suspension order, Suncanna was in violation of its lease agreement with us. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna. Consequently, during the quarter ended June 30, 2016, we stopped recognizing
lease revenue and wrote off the $700,000 lease receivable and $43,400 deferred rent that had been recorded as of December
31, 2016. We also wrote off advances to Suncanna of $587,000.
|
|
|
|
|
|
|
–
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate
the greenhouse by September 6, 2016.
|
|
|
|
|
|
|
–
|
On
August 31, 2016, a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
|
|
|
|
|
|
|
–
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and
began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016.
|
|
|
|
|
|
|
–
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are considering
an appeal.
|
|
|
–
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed.
|
|
|
–
|
On
October 17 and 18, 2017 depositions were taken from Mr. Harding and others associated with the Company for the Suncanna lawsuit.
While attempts to settle Suncanna’s complaint against the Company have continued, preparations are underway for a three
week trial currently scheduled for October, 2018.
|
|
|
|
|
|
●
|
Our
second greenhouse project will be operated by GrowCo Partners 2, LLC, or GCP2. This project will consist of a 90,000 square
foot greenhouse and a 15,000 square foot processing and warehouse facility on 40 acres of land. The GCP2 greenhouse structure
was ordered in 2016, construction began in January 2016, and completion is projected for the second half of 2018. Our construction
costs for the GCP2 greenhouse totaled $2.8 million through December 31, 2017, and we estimate that an additional expenditure
of $3.5 million will be required to complete construction. For a summary of financing activities in connection with the GCP2
greenhouse, please see “—Liquidity and Capital Resources” below.
|
Water
Current
Rights Holdings
In
Colorado, it is important to have both surface and storage rights, of which we have both. To date, we have acquired, managed and
used our water assets principally for use in irrigation, to increase the value and yield of our farmland. While the majority of
our assets relate to water, our efforts have focused on our farmland and, more recently, our marijuana greenhouse projects.
We
owned the following surface water rights as of February 9, 2018:
Structure
|
|
Elevation
(feet)
|
|
|
Priority
No.
|
|
|
Appropriation
Date
|
|
Consumptive
Use (A.F.*)
|
|
|
Decreed
Amount (cfs**)
|
|
Butte
Valley Ditch
|
|
|
5,909
|
|
|
|
1
|
|
|
05/15/1862
|
|
|
360
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
9
|
|
|
05/15/1865
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
86
|
|
|
05/15/1886
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
111
|
|
|
05/15/1886
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Rice Ditch
|
|
|
5,725
|
|
|
|
19
|
|
|
03/01/1867
|
|
|
131
|
|
|
|
3.0
|
|
|
|
|
4,894
|
|
|
|
120
|
|
|
02/02/1888
|
|
|
2,891
|
|
|
|
42.0
|
|
|
|
|
|
|
|
|
342
|
|
|
05/01/1905
|
|
|
|
|
|
|
18.0
|
|
*
A.F. = Acre Feet
**
cfs = cubic feet per second
The
following table presents our holdings of storage water rights as of February 9, 2018:
Structure
|
|
Elevation
(feet)
|
|
|
Priority
No.
|
|
|
Appropriation
Date
|
|
Average
Annual Yield (A.F.)
|
|
|
Decreed
Amount (A.F.)
|
|
|
Operable
Storage (A.F.)
|
|
Huerfano
Valley Reservoir
|
|
|
4,702
|
|
|
|
6
|
*
|
|
02/02/1888
|
|
|
1,424
|
|
|
|
2,017
|
|
|
|
1,000
|
|
Cucharas
Valley Reservoir
|
|
|
5,570
|
|
|
|
66
|
|
|
03/14/1906
|
|
|
3,055
|
|
|
|
31,956
|
|
|
|
-
|
|
|
|
|
5,705
|
|
|
|
66
|
**
|
|
03/14/1906
|
|
|
|
|
|
|
34,404
|
|
|
|
|
|
Bradford
Reservoir
|
|
|
5,850
|
|
|
|
64.5
|
|
|
12/15/1905
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
Orlando
Reservoir #2
|
|
|
5,911
|
|
|
|
349
|
|
|
12/14/1905
|
|
|
1,800
|
|
|
|
3,110
|
|
|
|
2,400
|
|
*
|
This
storage right is only one of the reservoirs included in the Reed Decree. This Decree allows for multiple fillings per year.
Other storage rights only allow for a single storage per year.
|
**
|
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.
|
New
Strategic Initiative
With
our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether
our water assets might have revenue potential of their own, separate from use in irrigating our 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 the success 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:
|
●
|
We
will seek to address the need for municipal water storage.
|
|
|
|
|
●
|
We
believe there are a variety of opportunities to lease, both short term and long term, our water assets.
|
|
|
|
|
●
|
We
have identified underutilized land and water that we own that could be used to for either a crop share arrangement or farming
operations. Currently our focus is on hemp production with a CBD focus.
|
|
|
|
|
●
|
In
January 2011, we entered into a water supply agreement to supply water resources for real estate development in Huerfano County,
Colorado. This agreement was subsequently amended to add additional water taps.
|
Results
of Operations
Comparison
of the Nine Months Ended September 30, 2017 and 2016
During
the Nine months ended September 30, 2017, we recorded revenues of $2,905,000, compared to $65,000 in the Nine-month period ended
September 30, 2016. The increase in revenues from the prior year was overwhelmingly due to our greenhouse operations. Other revenue
of $40,000 in both years was from leasing of properties.
Operating
expenses during the Nine months ended September 30, 2017 and 2016 were $1,544,000 and $2,869,000, respectively. The decrease of
$1,325,000 was primarily due to the recording of $910,000 in accounts receivable reserve in the Nine months ended September 30,
2016 due to the pending eviction of our former tenant in the greenhouse. The remainder of the decline in expenses was due to lower
legal, depreciation and salary costs. During the Nine months ended September 30, 2017 and 2016, we recognized a loss from continuing
operations of $619,000 compared to a loss of $4,019,000, respectively. For the Nine months ended September 30, 2017 and 2016,
loss from discontinued operations was $1,174,000 and $316,000 respectively.
Other
expenses for the Nine months ended September 30, 2017 and 2016 were $1,980,000 and $1,215,000 respectively. The increase of $765,000
was largely due to an increase in interest expense of $643,000.
As
the result of the foregoing, the net loss attributed to our common shareholders, after recognizing preferred distributions and
income attributed to non-controlling interest, for the Nine months ended September 30, 2017 was $3,135,000, compared to a loss
of $6,280,000 for the Nine months ended September 30, 2016. The decrease of $3,145,000 is due primarily to the substantial increase
in greenhouse revenues and the other reasons stated above.
Comparison
of the Years Ended December 31, 2016 and 2015
For
the years ended December 31, 2016 and 2015 our revenues have been predominantly derived from the activities of our farming business
and greenhouse leasing activities. Near the end of 2016 we decided to discontinue our farming operations. Consequently,
we have classified our farming financial results on our income and balance sheet statements as Discontinued Operations.
Our
first greenhouse began to generate revenue on September 1, 2015 and was partially occupied by Suncanna (our former related party
tenant, as described under “Overview”). Suncanna had agreed to pay the full lease payments effective September 1,
2016. At December 31, 2015, we had recorded lease receivables of $904,000 and deferred rent of $43,400 in connection with the
Suncanna lease arrangements. On April 14, 2016 we were notified that Suncanna LLC had received a notice of suspension from the
Marijuana Enforcement Division of the Colorado Department of Revenue.
Due
to the suspension order and Suncanna’s non-payment, Suncanna was in violation of its lease agreement with us. On April 25,
2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Consequently, during the quarter
ended March 31, 2016, we stopped recognizing lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent
that had been recorded as of December 31, 2015. We also wrote off advances to Suncanna totaling $587,000.
During
the year ended December 31, 2016, we recognized revenues from greenhouse leasing operations of $204,000 compared to $947,000,
in revenues from greenhouse leasing operations during the year ended December 31, 2015, which as mentioned previously was subsequently
written off in 2016. Other revenues during the year ended December 31, 2016 was $68,000 compared to $78,000 for the year ended
December 31, 2015.
For
the year ended December 31, 2016, the gross margin of $272,000 was due to the margin on greenhouse leasing operations.
For
the year ended December 31, 2015, the gross margin was $822,000 also primarily due to greenhouse leasing operations margin that
was subsequently written off in 2016.
During
the year ended December 31, 2016, expenses from operations were $3,877,000 compared to $2,224,000 for the year ended December
31, 2015. The increase of $1,653,000 was primarily due to higher general and administrative expense resulting from the write-off
of Suncanna accounts receivable and advances in the first quarter and higher legal fees.
During
the year ended December 31, 2016, other expenses were $2,090,000 compared to $1,313,000 for the year ended December 31, 2015.
The increase in other expenses of $777,000 was the result of an increase in GrowCo interest expense of $543,000, and a $241,000
increase in warrant and stock option expense.
These
figures produced a net loss from continuing operations of $5,695,000 for the year ended December 31, 2016 compared to a net loss
of $2,715,000 for the year ended December 31, 2015.
Loss
due to discontinued operations was $2,624,000 for the year ended December 31, 2015 compared to a loss of $1,025,000 for the year
ended December 31, 2015. The increase was due to a loss from disposal of intangibles of $887,000, a loss from disposal of assets
of $359,000, and a $90,000 decrease in gross margin from farming operations.
Liquidity
and Capital Resources
We
historically have funded our operations primarily from the following sources:
|
●
|
proceeds
of private placements of equity, equity-related and debt securities of Two Rivers Water & Farming Company and subsidiaries;
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cash
flow generated from operations; and
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loans
and lines of credit.
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As
of September 30, 2017, we had cash and cash equivalents of $102,000. As of September 30, 2017, we had no available commercial
banking line or letters of credit and do not intend to seek any such financing in the foreseeable future.
We
currently expect that our cash expenditures will remain constant for the foreseeable future, as we complete our second greenhouse,
and seek to monetize our water assets. As a result, our existing cash, cash equivalents and other working capital may not be sufficient
to meet all projected cash needs contemplated by our business strategies for the remainder of 2017 and for 2018. To the extent
our cash, cash equivalents and other working capital are insufficient to fund our planned activities, we may need to either slow
our growth initiatives or raise additional funds through public or private equity or debt financings. We also may need to raise
additional funds in the event we determine in the future to affect one or more acquisitions of businesses, technologies and products.
If additional funding is required, we cannot assure that we will be able to affect an equity or debt financing on terms acceptable
to us or at all.
Sources
of Funds
Cash
flows generated by our financing activities for the nine months ended September 30, 2017 was $2,161,000 compared to $4,939,000
for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we raised $1,520,000 from our GrowCo
$2M Exchange Note offering, and reduced $1,713,000 in principal on our debt in conjunction with the sale of our DFP equipment.
Cash
flow from operations has not historically been sufficient to sustain our operations. Cash flow consumed by our operating activities
totaled $2,459,000 for the nine months Ended September 30, 2017 and $2,123,000 for the nine months Ended September
30, 2016.
Uses
of Funds
As
of September 30, 2017, we had $1,714,000 in current assets and $21,111,000 in current liabilities. Of the current liabilities,
$6,382,000 is from seller carry back notes of our subsidiary Huerfano Cucharas Irrigation Company, or HCIC, that were originally
due September 30, 2016. As of September 30, 2017, we are in default on the HCIC note payments. As a result, the entire amount
of the notes has been classified as current. As of September 30, 2017, management had received written commitments to extend $5,653,000
of these notes to July 1, 2019. The HCIC seller carry back notes have the HCIC ditch system as collateral, with an appraised value
of $26,217,000.
Additionally,
another $4.0 million of GrowCo notes are classified as current liabilities. The notes are due April 1, 2020; however, the holders
have the right to request full payment of the principal balance with a 60-day notice. On January 22, 2018, we were notified
that the holder of $2.15 million of these notes is demanding early payment. This was done via a court filing. GrowCo and Two Rivers
are in discussions to work out a payment plan with the holder. Two Rivers does not consider this to be a material event to Two
Rivers since in the near term, cash flow to Two Rivers from GCP1 will not be significant.
Cash
generated by investing activities was $250,000 for the nine months ended September 30, 2017 compared to $2,734,000 used
for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we sold property
and equipment for net proceeds of $945,000 and continued on our construction of the GCP2 greenhouse totaling $506,000.
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern although as stated
in Note 9, the Company’s current cash balance and pending financing raises substantial doubt.
The
Company is implementing a new strategy focusing on its water assets along with associated capital raises. On March 13, 2017, we
raised $257,000 as the first round of preferred funding for our new Water Redevelopment Company. We plan to continue capital raises
to fund our water initiatives. On April 17, 2017 $200,000 was raised in a second round of preferred investment in Water
Redevelopment.
We
believe that the actions planned by management to address our liquidity issues as described above are probable of occurring and
mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months
from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate
liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as
currently planned.
Critical
Accounting Policies
We
have identified the policies below as critical to our business operations and the understanding of our results from operations.
The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations” where such policies affect our reported and expected
financial results. For a detailed discussion of the application of these and other accounting policies, see Note 2 of the notes
to condensed consolidated financial statements included elsewhere in the registration statement of which this prospectus is a
part. Our preparation of such condensed consolidated financial statements requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance
that actual results will not differ from those estimates.
Revenue
Recognition
The
lease between GCP1, a subsidiary of TR Capital Partners, LLC, and its related party lessee, Johnny Cannaseed, is classified as
an operating lease under ASC 840. Payments under the lease agreements with Johnny Cannaseed are deferred for seven months after
occupancy and these deferred rent payments will be repaid over a period of 24 months after payments begin.
Member
Assessments
Once
per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment
per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half
of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by the Parent 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.
Debt
and Equity
We
account for warrants issued with debt in accordance with Accounting Standards Codification, or ASC, 470, Debt, and allocates proceeds
received to the warrants based on relative fair values.
We
also evaluate whether the issuance of the convertible instruments generates a beneficial conversion feature, or 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. We would recognize the BCF by allocating the intrinsic value of the conversion option, which is
the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion price per
share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in a discount
on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
Stock
Based Compensation
We
account for share-based payments in accordance with FASB ASC 710-10-55. We use the Black-Scholes option valuation model to estimate
the fair value of stock options and warrants issued under ASC 710-10-55. For the years ended December 31, 2016 and 2015, equity
compensation in the form of stock options, warrants and grants of restricted stock that vested totaled $477,000 and $204,000,
respectively.
Recently
Issued Accounting Pronouncements
In
April 2015, FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of
Debt Issuance Costs. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2016. Early adoption is allowed for financial statements that have not been previously issued. Debt issuance
costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability,
similar to the presentation of debt discounts. The Company has elected to adopt this ASU early and is presented in these financial
statements.
In
February 2016, the FASB issued Accounting Standards Update, or ASU, 2016-02, “Leases”. The new standard establishes
a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December
15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach is required for
lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result
in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management believes
that this ASU will have an impact on its financials and is in the process of analyzing its impact.
In
November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that
deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify the
presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this
update to have a material impact on its financial statements.
In
August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09,
“Revenue from Contracts with Customers”, which amended revenue recognition guidance to clarify the principles for
recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record the transfer
of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange
for those goods or services. Expanded additional disclosures are required relating to the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required
about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill
a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one
of two prescribed retrospective methods. Early adoption is not permitted. At this point, due to the Company having no revenue
contracts with customers, except for leasing agreements, Management believes that there will be no material impact on its financial
statements.
In
July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. Under this ASU, inventory will
be measured at the “lower of cost and net realizable value” and options that currently exist for “market value”
will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current
guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016.
Early application is permitted and should be applied prospectively. Management has early adopted ASU 2015-11 and notes no material
impact on the Company’s financial position or results of operations.
In
August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as
a Going Concern, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40 Presentation of Financial Statements – Going Concern”,
by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial
statements, including requiring management to perform interim and annual assessments of an entity’s ability to continue
as a going concern within one year of the date of issuance of the entity’s financial statements and providing certain disclosures
if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 will be effective after
December 15, 2016, and early adoption is permitted.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements
Goodwill
and Intangible Assets
We
have acquired water shares in Huerfano-Cucharas Irrigation Company, which is considered an intangible asset and shown on our balance
sheet as part of “Water assets.” Currently, these shares are recorded at purchase price less our pro rata share of
the negative net worth in HCIC Holdings, LLC. Management evaluates the carrying value, and if necessary, will establish an impairment
of value to reflect current fair market value. Currently, there are no impairments on the water shares.
In
2012, we acquired a produce business, which is considered an intangible asset and shown on our balance sheet as “Intangible
assets, net.” Management evaluated the purchase price of $1.0 million and allocated this price to customer list, trade name
and goodwill.
Capitalization
of Certain Interest Expenses
As
part of our GrowCo development operations, which began in July 2014, we incur large construction costs, which are capitalized.
The related interest expenses incurred related to these expenditures can be capitalized per ASC 720-15. This guidance states that
interest should be capitalized in relation to the following assets: (i) assets that are constructed or otherwise produced for
an entity’s own use, (ii) assets intended for sale or lease that are constructed or otherwise produced as discrete projects,
and (iii) investments accounted for by the equity method while the investee has activities in progress necessary to commence its
planned principal operations. As the GrowCo assets classify under the second point, we began the process of calculating interest
costs to be capitalized each quarter. Interest capitalization begins when the expenditures begin and interest is being incurred.
Management independently determines the start point for each individual project when it commences. At the end of each quarter,
management will then take the average accumulated expenditures for each project, multiplied by the interest rate on the associated
debt (or the weighted average rate on all debt if no debt is specifically associated) to arrive at a capitalized interest amount.
This amount will be booked as an adjustment to interest expense each quarter. Once the construction process ends and the asset
is deemed ready for use, capitalization of interest will cease.
Impairment
Policy
At
least once every year or whenever events and circumstances indicate the carrying value may not be recoverable, management examines
all of our assets for proper valuation and to determine if an impairment is necessary. In terms of real estate owned, this impairment
examination also includes the accumulated depreciation. Management examines market valuations and if an additional impairment
is necessary for lower of cost or market, then an impairment charge is recoded.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
On
November 28, 2017, we were notified by Eide Bailly LLP of its decision to resign as our independent registered public accounting
firm. During the fiscal years ended December 31, 2016 and 2015, and in the subsequent interim period through November 28, 2017,
there were (a) no disagreements with Eide Bailly on any matters of accounting principles or practices, financial statement disclosure
or auditing scope or procedure which disagreements, if not resolved to the satisfaction of Eide Bailly, would have caused Eide
Bailly to make reference to the matter in their reports on the consolidated financial statements for such years and (b) no reportable
events, as defined in Item 304(a)(1)(v) of Regulation S-K
On
December 1, 2017, the audit committee of our board of directors approved the engagement of M&K CPAS, PLLC, (“M&K”),
as our independent registered public accounting firm for the year ended December 31, 2017. We signed an engagement letter with
M&K on December 4, 2017.
BUSINESS
Overview
“As
water becomes ever more scant the world needs to conserve it, use it more efficiently and establish clear rights over who owns
the stuff.” – Liquidity Crisis, The Economist, Nov 5, 2016
The
management of water is our core business.
We
are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets
and land in the Huerfano and Cucharas river basins in southeastern Colorado. Our water asset area spans over 1,900 square miles
and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, east of Pueblo, Colorado at 4,500 feet.
We operate in a natural, gravity fed water alluvial that 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 and will sell assets that we have determined will not yield significant future returns to our shareholders and invest
strategically in the assets that will. Specifically, during the quarter ended March 31, 2017 we sold Dionisio Farms & Produce,
Inc., or DFP, and the associated irrigated farmland currently used for the production of produce, as it no longer serves our strategic
vision of water management.
In
2014 we initiated a corporate restructuring pursuant to which we are organizing substantially all of our operations under the
control of TR Capital Partners, LLC, or TR Capital. This restructuring better reflects our emphasis on acquiring and operating
irrigated farming and water distribution activities under our integrated business model. TR Capital issued all of its common units
to us and, as of March 20, 2015, had issued a total of 30,158,815 preferred units in exchange for aggregate consideration consisting
of $6.0 million in cash and $18.9 million of certain outstanding equity securities of our subsidiaries. Please see “Our
Organizational Structure” below for further information about the corporate restructuring and TR Capital’s outstanding
units.
In
May 2014 we formed GrowCo to construct state of the art greenhouses and related infrastructure to be leased to licensed cannabis
growers, and issued 20 million shares of its common stock to Two Rivers. In August 2014 we announced that we were reserving 10
million of the GrowCo shares for distribution to holders of our 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. On each record date, we recorded a pending distribution of 2,500,000 GrowCo common shares on a pro
rata basis to holders of common stock after a registration statement covering GrowCo common shares has been filed and declared
effective, which has not yet occurred. Currently, GrowCo has 30 million common shares outstanding, of which 6.7 million shares
are subject to performance unvesting, which has yet to occur.
In
June 2016 we began a restructuring process. We appointed a new Chief Executive Officer, Wayne Harding, who had served as our Chief
Financial Officer since 2009. At our annual shareholder meeting on September 30, 2016 a new board of directors was elected. Our
board now contains six people, of which all are classified as independent members, except for Mr. Harding. All board members
are also investors in the Company. Please see “Management—Corporate Governance” for more information about
our board.
Since
commencing operations in 2009, we have invested in acquiring and developing irrigated farmland and associated water rights and
infrastructure. Our principal investments to date have been the following:
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DFP
(discontinued operations)
: In 2012 we acquired 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.
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HCIC
:
From 2009 to 2010 we purchased 96% 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 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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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 Huerfano and Pueblo Counties.
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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Additional
Farmland
: From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s ditch system for purchase prices
totaling $1.4 million in cash and seller carry back financing. In 2012 we acquired 1,584 acres in Butte Valley for $509,000
in cash and seller carry back financing. In 2016, we returned 187 acres of Butte Valley land back to the holder of seller
carry back financing in exchange for forgiveness on $187,000 of debt and associated accrued interest.
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GrowCo:
We formed GrowCo, Inc., or GrowCo, in May 2014 for the purpose of constructing state-of-the-art computer controlled greenhouses
to be leased to licensed marijuana growers throughout the United States. GrowCo is not a licensed marijuana grower or retailer.
GrowCo does not “touch the plant” and only provides growing infrastructure as a landlord for licensed marijuana
grower tenants along with support and administrative services.
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Water
Redevelopment Company:
We formed Water Redevelopment Company, or 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.
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Our
Water Operations
We
own a portfolio of water rights in the Arkansas River Basin that we have obtained in connection with our purchases of irrigated
farmland. 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.
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 their use in irrigating our farmland, that could benefit
our stakeholders, including our shareholders and the communities surrounding our water assets. On September 30, 2016, our board
established a board-level task force to identify opportunities to monetize our existing water assets. As a result of that investigation
and resulting report, water has become the top-priority for our Company.
Our
principal water rights include the following:
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As
noted above, we acquired control of HCIC in order to use its water rights and facilities to supply some of our farmland with
irrigation water. The HCIC farmland became fallow in the mid-twentieth century when coal mines in Huerfano County, Colorado,
were shut down. The coal mines had continuously pumped water from the Vermejo/Trinidad Formation, which contained a renewable
underground aquifer that is fed by Sangre de Cristo Mountains snowmelt. The U.S. Geological Service estimates that the Raton
Vermejo Basin, where we have water rights, contains an estimated 12 trillion gallons or 36 million acre-feet of relatively
untapped, clean and renewable water (Adam Bedard, 2010). HCIC owns the Cucharas and Huerfano Valley Reservoirs and two ditch
systems located in Pueblo County, Colorado. The HCIC ditch systems maintain the right to distribute water over approximately
30,000 acres in Pueblo County, Colorado.
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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 of water is the amount of water required to cover one acre of land to a depth of one foot. An acre-foot of water contains
325,851 gallons, generally considered enough water to supply two average households for a year. Annual irrigation in Southeastern
Colorado, depending on the crops, consumes approximately three to six acre-feet of water per acre of crop.
By
capturing water in reservoirs and releasing it later for irrigation purposes, we are able to re-time the delivery of water throughout
the irrigation season and ameliorate some of the inconsistencies of seasonal and annual water availability for the farmland we
manage.
Surface
Water Rights
Tributary
ground water is any underground water that is hydraulically connected to a stream system and that influences the rate or direction
of flow in that stream system. Any new ground water diversions that are tributary to an over-appropriated stream system require
augmentation to offset out-of-priority depletions. In 2013, many well water users on the Arkansas River and its tributaries were
unable to use their wells, as drought conditions made augmentation water unavailable. In response, an augmentation provider requested
that we assist in building a more efficient and plentiful augmentation supply. We had intended to assist with an augmentation
supply, but due to capital requirements, we terminated those plans. Also, the years ended December 31, 2015 and 2014 were considered
wetter years, so the demand for augmentation supply was reduced.
We
own the following surface water rights as of December 31, 2017:
Structure
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Elevation
|
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Priority
No.
|
|
|
Appropriation
Date
|
|
Consumptive
Use (A.F.)
|
|
|
Decreed
Amount (cfs)
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|
Butte
Valley Ditch
|
|
|
|
|
|
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1
|
|
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05/15/1862
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|
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360
|
|
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1.2
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Butte
Valley Ditch
|
|
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5,909
ft
|
|
|
|
9
|
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05/15/1865
|
|
|
|
|
|
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1.8
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Butte
Valley Ditch
|
|
|
|
|
|
|
86
|
|
|
05/15/1886
|
|
|
|
|
|
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3.0
|
|
Butte
Valley Ditch
|
|
|
|
|
|
|
111
|
|
|
05/15/1886
|
|
|
|
|
|
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3.0
|
|
Robert
Rice Ditch
|
|
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5,725
ft
|
|
|
|
19
|
|
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03/01/1867
|
|
|
131
|
|
|
|
3.0
|
|
Huerfano
Valley Ditch
|
|
|
4,894
ft
|
|
|
|
120
|
|
|
02/02/1888
|
|
|
2,891
|
|
|
|
42.0
|
|
Huerfano
Valley Ditch
|
|
|
|
|
|
|
342
|
|
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05/01/1905
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18.0
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Storage
Rights and Infrastructure
The
following table presents our holdings of storage water rights as of December 31, 2017:
Structure
|
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Elevation
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|
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Priority
No.
|
|
|
Appropriation
Date
|
|
Average
Annual
Yield (A.F.)
|
|
|
Decreed
Amount (A.F.)
|
|
|
Operable
Storage (A.F.)
|
|
Huerfano
Valley Reservoir
|
|
|
4,702
ft
|
|
|
|
6
|
|
|
02/02/1888
|
|
|
1,424
|
|
|
|
2,017
|
|
|
|
1,000
|
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Cucharas
Valley Reservoir*
|
|
|
5,570
ft
|
|
|
|
66
|
|
|
03/14/1906
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|
|
3,055
|
|
|
|
31,956
|
|
|
|
10,000
|
|
Cucharas
Valley Reservoir**
|
|
|
5,705
ft
|
|
|
|
66
|
c
|
|
03/14/1906
|
|
|
|
|
|
|
37,083
|
|
|
|
|
|
Bradford
Reservoir
|
|
|
5,850
ft
|
|
|
|
64.5
|
|
|
12/15/1905
|
|
|
-
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6,000
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-
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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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2,400
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*
In the quarter ending March 31, 2016, the Company entered into a stipulation agreement with the State of Colorado, Office of the
State Engineer, whereby the Company agreed to take the Cucharas Valley Reservoir down to the sediment level. This is anticipated
to occur in later 2017. The Company also intends to work with the Colorado State Engineer to construct a new dam close to the
prior dam structure, pending financing.
**
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.
The
Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders
have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County,
Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co.,
(Pueblo Water Court)). As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring
water rights holders deemed wasteful. In the quarter ending March 31, 2016, the Company entered into a stipulation agreement with
the State, settling the State’s claims, whereby the Company agreed to take the existing dam structure down to the sediment
level. This is anticipated to occur in later 2017. The Company also intends to work with the Colorado State Engineer to construct
a new dam close to the prior dam structure, pending financing. The remainder of the litigation between Company and the neighboring
water rights holders awaits a trial setting.
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 neighboring water
users for a storage leasing fee. Through water exchanges and other water-related transactions, the reservoirs can potentially
increase and strengthen our existing water rights.
All
of our reservoirs are used for irrigation in a similar manner to other reservoirs in the region, with the exception of Pueblo
Reservoir, which was also constructed for flood control. Direct flow rights generally are senior to most storage rights but typically
do not divert early in the spring when storage rights fill. The Arkansas River below Pueblo Reservoir operates a Winter Storage
Program that re-allocates winter direct flow rights to storage in reservoirs from November 15 to March 15 each year.
Because
our water rights and operating structures are located at succeeding elevations in the watershed, the system moves water supplies
from point of diversion, through storage, to place of use primarily by means of gravity, making our system more economical to
operate than systems requiring energy to pump water for beneficial use.
In
order to use these rights and structures most efficiently, we have planned and begun to implement a program of renovation and
integration. For example, in November 2011 we began construction of new outlet works for the Orlando Reservoir built in 1905.
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 2016 an estimated 22,000 acre-feet flowed through the Cucharas dam site.
“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.
New
Strategic Initiative
With
our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether
our water assets might have revenue potential of their own, separate from use in irrigating farmland, that could benefit our stakeholders,
including our shareholders and the communities surrounding our water assets. On September 30, 2016, our board 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.
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We
believe there are a variety of opportunities to lease our water assets, both short term and long term.
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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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In
January 2011, we entered into an agreement to supply water resources for real estate development in Huerfano County, Colorado.
We intend to begin the development and legal process to deliver raw water to this development in 2018.
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Provide
farmland with associated water rights to a hemp farmer under a crop share arrangement.
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Our
Greenhouse Operations
We
seek to use our land and associated water rights to create revenue streams. With the legalization of recreational marijuana usage
in Colorado in 2012, we identified the potential use of certain of our farmland for lease to licensed marijuana growers. In May
2014, we formed GrowCo to focus and lead our efforts to take advantage of the rapidly growing demand for marijuana, both medical
and recreational, within the state of Colorado.
GrowCo
Partners 1 and GrowCo Partners 2, separate Colorado limited liability companies, will own the first two greenhouse projects.
Greenhouse
Development and Leasing
Due
to the strategic location of our land and water assets, several greenhouse operators have approached us to purchase some of our
farmland and water rights. Since long-term ownership of farmland and water rights is core to our business, we will only approve
one time sales if we believe that doing so will provide a better return than investing in the property to monetize its value.
Our fundamental strategy is to use our excess land and associated water to create a long-term revenue stream.
In
Colorado, since the legalization of recreational marijuana use in 2012, the demand for marijuana has increased substantially.
Presently over 80% of Colorado marijuana is grown in converted warehouses. Sophisticated growers understand that a warehouse production
facility is not the most ideal for production. This has given rise to a strong demand for greenhouse space for marijuana production.
Early estimates show a greenhouse can produce at least twice the amount of product at less than 50% of the cost compared to warehouse
production. New construction of greenhouses must be tied to water supply. However, there are only a limited number of counties
in Colorado, including Pueblo County, where we have the majority of our land and associated water rights, that allow for new greenhouse
construction for lease to marijuana growers.
Location
and water, coupled with knowledge of greenhouse operations are key to success in marijuana production. In 2014, we selected a
group knowledgeable in greenhouse operations and have consulted with marijuana growers in order to design a greenhouse with optimal
features for efficiency. In May 2014, we formed GrowCo, which issued 20,000,000 shares of its common stock to us. On August 1,
2014 we announced that we were reserving 10,000,000 of the GrowCo shares to be distributed to holders of common stock as of four
record dates (January 1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after an effective registration statement is filed,
which has not yet occurred. On each record date, we recorded a pending distribution of 2,500,000 GrowCo common shares on a pro
rata basis to holders of common stock.
GrowCo
Partners 1, LLC – First Greenhouse
On
January 20, 2015, GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which
consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land. These
facilities were leased to Suncanna, LLC, or Suncanna, and were occupied in September 2015 with lease revenue accrued beginning
September 1, 2015.
In
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
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On
April 14, 2016 we were notified that Suncanna had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
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This
suspension, in addition to non-payment of back due lease payments owed, caused Suncanna to be in violation of its lease with
GCP1. On April 25, 2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Due
to the eviction process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related
Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. During
the nine months ended September 30, 2016, we recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna
in early April 2016. The total write off of $1.330 million was partially offset by a $350,000 reduction in the amount owed
to the GCP1 preferred unit holders. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate the greenhouse by September 6, 2016.
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On
August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC, TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
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On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated and GCP1 took possession of the greenhouse
and began re-conditioning it for a new tenant, which began growing operations in December, 2016.
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On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this
decision.
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Pending
the eviction of Suncanna, on August 4, 2016 GCP1 entered into a lease agreement with a related party Johnny Cannaseed, LLC, or
Johnny Cannaseed, which is owned predominantly John McKowen, our former Chief Executive Officer and current majority shareholder.
Under the terms of the lease, one half of the GCP1 greenhouse was sublet to a licensed marijuana grower on December 1, 2016. The
second half of the greenhouse was leased to a second licensed marijuana grower on March 1, 2017. We recorded lease receivables
of $240,000 from Johnny Cannaseed for the year ended December 31, 2016 and $• for the nine months ended September 30, 2017.
As
of September 30, 2017, the Company recognized an accounts receivable, related party of $1,514,000. This represents the GCP1 tenant
receivable. The managers of GCP1 are in negotiations with the tenant that, if successful, will require the Company to write off
$1,014,000 of this receivable in the three months ended December 31, 2017 and $500,000 of the back due lease payment will be brought
current through 24 monthly payments beginning in August, 2018.
GrowCo
Partners 2, LLC – Second Greenhouse
Our
second greenhouse project will be developed by GrowCo Partners 2, LLC, or GCP2, with the intention of leasing to licensed marijuana
growers. This project will consist of another 90,000 square foot greenhouse, a 15,000 square foot processing and warehouse facility
and an extraction facility on 40 acres of land within our Pueblo grow complex. The GCP2 greenhouse structure was ordered in 2015,
construction began in January 2016, and completion is projected for mid-2018. Our construction costs for the GCP2 greenhouse
totaled $2.9 million through December 31, 2016, and we estimate that an additional expenditure of $3.0 million will be required
to complete construction. For a summary of financing activities in connection with the GCP2 greenhouse, please see “—Liquidity
and Capital Resources”.
On
August 4, 2016 GCP2 entered into a lease agreement with Johnny Cannaseed. Under the terms of that agreement rent will begin when
the greenhouse is completed and ready for occupancy. Johnny Cannaseed has signed a lease for half of the second greenhouse with
a licensed marijuana grower.
GrowCo
Notes, Exchange Notes and GCP Super Units
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
March 2016, GrowCo completed a $5.5 million private placement of equity interests of GCP Super Units, LLC, which will invest directly
in various assets of GrowCo, with proceeds to be used to complete the construction of the first greenhouse, partially fund the
second greenhouse and provide GrowCo working capital. The outside investment in GCP Super Units, LLC is reflected on our balance
sheet as a non-controlling equity interest.
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6.0 million or $7.0 million, in each case together with warrants to purchase, at a price of $0.25 per share,
0.25 GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6.0 million
version of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the
$300,000 principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000
remain outstanding. As of March 7, 2017, GrowCo had raised $5.0 million, including the $200,000 of notes issued in exchange for
the earlier offered notes, at which time the offering was closed. A new $2.0 million offering was subsequently initiated in March
of 2017 with substantially the same terms for the purposes of finishing the second greenhouse.
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 approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations.
We formed TR Capital, which issued all of its common units to us. In a series of transactions from January to September 2014,
TR Capital entered into Membership Interest Purchase Agreements pursuant to which it issued and sold a total of 30,158,815 preferred
units to investors in exchange for consideration comprised of $6.0 million in cash and $18.9 million of outstanding equity and
equity-related securities of our subsidiaries other than HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company.
The
TR Capital Partners Limited Liability Company Agreement dated as of January 31, 2014 provides that holders of preferred units
generally will be entitled to receive distributions each fiscal year in an amount equal to the lesser of (a) 12% of the preferred
unit holders’ aggregate capital contributions and (b) TR Capital’s Adjusted Gross Margin (as defined) for such fiscal
year. Regardless of TR Capital’s operating results, however, preferred unit holders are entitled to a minimum distribution
for each full fiscal year equal to 8% of their aggregate capital contributions, payable in equal quarterly installments. If TR
Capital’s Adjusted Gross Margin for a fiscal year is less than 12% of the preferred unit holders’ aggregate capital
contributions, the shortfall will not be payable in any subsequent fiscal year. Distributions for fiscal year 2014 for each preferred
unit were prorated for the portion of the year that the preferred unit was outstanding.
Pursuant
to an Exchange Agreement dated as of January 31, 2014 we entered into with TR Capital, any holder may surrender a TR Capital preferred
unit to us at any time for consideration consisting of (a) accrued but unpaid preferred distributions on the preferred unit through
the exchange date, (b) one share of common stock and (c) a warrant to purchase an additional one-half share of common stock at
a price of $2.10 per share. TR Capital may require (with limited exceptions) each of its outstanding preferred units to be surrendered
to us in exchange for such consideration at any time after January 31, 2017, at which (1) for a period of 20 trading days, at
least 250,000 shares of common stock have been traded on a national securities exchange for a closing price of at least $3.00
and (b) a registration statement filed by us with the SEC is effective with respect to the shares of common stock, including shares
purchasable pursuant to warrants, issuable upon such exchanges. Each warrant issued upon any such exchange generally will be exercisable
at any time on or before January 31, 2019, subject to our right to redeem the warrant at any time after January 31, 2017, at which
(A) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange
for a closing price of at least $3.00 and (B) a registration statement has been filed and is effective with respect to the shares
of common stock issuable pursuant to such warrant. Under the Exchange Agreement, we also granted holders of preferred units one-time
demand registration rights under which we may be required to file a registration statement covering shares of common stock (including
shares subject to warrants) issued or issuable upon exchanges of TR Capital preferred units. As of March 21, 2017, we could be
required to issue and deliver to holders of outstanding TR Capital preferred units, upon exchange, up to 29,963,378 shares of
common stock together with warrants to purchase up to an additional 14,168,944 shares of common stock. If we receive any TR Capital
preferred units pursuant to exchanges under the Exchange Agreement, it would be entitled to receive distributions on those preferred
units pro rata with other holders of preferred units.
Following
the completion of those transactions in September 2014, TR Capital and our 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, we formed Water Redevelopment Company, a Delaware Corporation. The following chart shows a high level view of our corporate
organization as of February 9, 2018. For a more detailed description of ownership structure please refer to exhibit 21.1
filed herewith.
Corporate
Information
We
are a Colorado corporation with principal executive offices located at 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014,
where our telephone number is (303) 222-1000. Our website address is
www.2riverswater.com
. The information on our website
is not included as part of this report.
Revenue
Water
During
fiscal year 2016 and the nine months ended September 30, 2017, we had negligible revenues from our water business as our new initiatives
have not yet gained traction. In 2018, we expect that revenue will be generated from the leasing of water from our storage facilities,
the selling of water taps, and the leasing of land and water to agricultural users including marijuana and hemp growers.
Greenhouse
Leasing
TR
Capital Partners, LLC’s subsidiary, GrowCo Partners 1, LLC leases our first greenhouse and warehouse to a related party
Johnny Cannaseed pursuant to a lease agreement dated August 4, 2016. The lease agreement is classified as an operating lease because
it does not meet any of the four criteria listed in ASC 840-10-25,
”Lease Classification Criteria.”
Johnny Cannaseed
subleases the greenhouse and warehouse to two licensed marijuana growers. Revenue from the first half of the greenhouse began
accruing on December 1, 2016. The second half of the greenhouse began accruing revenue in mid-2017.
Two
Rivers subsidiary, GrowCo Partners 2, leases our second greenhouse and warehouse to a related party, Johnny Cannaseed, pursuant
to a lease agreement dated August 4, 2016 and began accruing revenue in mid- 2017.
Competition
Water
The
rights to use water in Colorado have been fully appropriated to beneficial uses (such as agriculture irrigation and municipal
and industrial applications) under court decrees and state regulation according to the prevailing Prior Appropriation Doctrine
in which more senior (older) water rights take precedence in times of shortage over junior (newer) water rights. Notwithstanding
significant conservation, growth in Colorado with related incremental demands for water has made the rights to divert, convey,
store and use water relatively scarce and valuable. There is significant competition for the acquisition and beneficial use of
historic water rights. Many competitors for the acquisition of such rights have significantly greater financial resources, technical
expertise and managerial capabilities than we do and, consequently, we could be at a competitive disadvantage in assembling, developing
and deploying water assets required to support our businesses. Competitors’ resources could overwhelm our efforts and cause
adverse consequences to our operational performance. To mitigate such competitive risks, we concentrate our efforts in the Huerfano
and Cucharas Rivers watershed where our local knowledge and control of a portfolio of water rights, storage facilities, distribution
canals and productive farmland creates a somewhat protected geographic niche. To further mitigate competitive risk, we strive
to actively engage with both the farming and municipalities in southeastern Colorado to explore strategies for cooperatively addressing
challenges and opportunities faced by those communities—particularly to address the 130,000 acre-foot shortfall in water
supplies on the Front Range, without taking valuable farmland out of production.
Leasing
There
a significant number of providers of facilities to lease to cannabis growers. Some are better capitalized than our Company. A
significant portion of the facilities offered for lease are enclosed, warehouse space. Through our development of state-of-the-art
greenhouses, we believe that we offer a competitive advantage to lessees of warehouse space in terms of increased production (estimated
to be three times the growth) and a significantly reduced cost of production (estimated at one-third the cost). Therefore, other
greenhouse structures offered to lease to cannabis growers are our main leasing competition. We are currently aware of only one
other similar size greenhouse in the Front Range of Colorado. This facility is owned by the same owners of medical and retail
outlets. Therefore, they are only growing product for their consumption. It is much like a single-tenant office building. There
are numerous other small greenhouses and others that are planned.
Regulation
Water
Background
The
right to water in Colorado is a right that can be developed, managed, purchased or sold much like real property subject to appropriate
regulation. Water rights are judicially decreed and, under Colorado’s application of the Prior Appropriation Doctrine (“first
in time, first in right”), senior water right holders are entitled to the beneficial use of water prior to junior holders.
Consequently senior water rights are more consistent, reliable and valuable than junior rights, which may be interrupted, or “called
out” in the parlance of Colorado water administration.
Along
the Front Range of Colorado, water is a scarce and valuable resource. Natural precipitation varies widely throughout the year
and from one year to another. Rivers, which fill, and sometimes flood, with the spring melt from the mountain snowpack, may be
refreshed only with the occasional thunderstorm in the heat of the summer growing season. Annual precipitation also varies between
surplus and drought. Additionally, the large majority of Colorado’s population resides on the Front Range (east of the Continental
Divide) while the large majority of the state’s precipitation falls on the Western Slope (west of the Divide). Over time,
many communities, farms and enterprises developed trans-mountain diversions to bring more water to the Front Range. Precipitation
on the Front Range, and water diverted from the Western Slope, drain to the Mississippi River through the South Platte and Arkansas
Rivers. Water on the Western Slope drains through the Colorado River. All of the state’s rivers are administered pursuant
to interstate compacts with neighboring states. As a result of the variability of Colorado’s hydrology, its arrangements
for diversions, storage and beneficial use, and its obligations to downstream states, the state has developed an integrated and
complex water rights administration system.
In
Colorado and the Western United States, the right to use water is based on the Prior Appropriation Doctrine, which is often referred
to as “first in time, first in right.” Under this doctrine, water use is allocated to satisfy the oldest (“most
senior”) water right before water is allocated to the next water right in historic chronology (a “junior water right”
in comparison to a water right perfected earlier). Moreover, in Colorado, water rights and their relative priorities are protected
by judicial decrees and are administered by the Office of the State Engineer, or the State Engineer, within the Colorado Department
of Water Resources. The ability to consistently irrigate farmland, and thus avoid the inconsistencies of rainfall, is therefore
tied to the relative seniority of historic water rights. Two Rivers is focused on developing irrigated farmland and maximizing
beneficial use of the water rights associated with that farmland.
To
manage water uses according to the Prior Appropriation Doctrine, Colorado maintains both judicial oversight through regional water
courts and administrative oversight through the State Engineer. Water rights claims are filed in the court, adjudicated as necessary
to resolve any adverse claims, and then decreed though an enforceable judgment. The State Engineer is charged with administering
the accorded priorities among the various water rights in each of the state’s river systems.
Colorado
water law further recognizes two distinct but related prior appropriative rights: direct diversion rights and storage rights.
Direct diversion rights permit a user in priority to divert water directly from the river for immediate beneficial use (such as
irrigation); storage rights permit a user in priority to divert water from the river and impound the water in a reservoir to re-time
the water for later beneficial use. Thus, in Colorado, a direct diversion right must be conveyed to an immediate use; it cannot
be stored without a storage right. As a result, both types of appropriative rights are often paired, when possible, so that in
priority diversion rights can be re-timed through the exercise of a companion storage right to address seasonal and year-to-year
variability in natural supplies. The older the appropriation date of any water right, the more reliable is its yield; similarly,
the more effectively a senior diversion right is paired with a senior storage right, the more reliable each becomes.
Administration
of Water Rights
In
addition to the intra-state administration of water flowing in its rivers, Colorado also has inter-state water administration
responsibilities because each of its major rivers (the Colorado, the North Platte and the Arkansas) is governed by interstate
compacts with downstream states. These compacts are subject to judicial review, interpretation and enforcement under the original
jurisdiction of the U.S. Supreme Court to resolve disputes among the states. In 1948, Colorado and Kansas reached an agreement
that apportioned the water of the Arkansas River. Colorado was apportioned 60% of the water while Kansas was apportioned 40% of
the River’s flow. In order to comply with Colorado’s obligations under the Arkansas River Compact, therefore, water
rights on the Arkansas and its tributaries (including the Huerfano and Cucharas Rivers) are administered to assure the Compact-required
water flows at the Colorado-Kansas state line. When necessary, Colorado’s in-state uses are curtailed, in reverse order
of priority, to assure compliance with the Compact.
The
interstate compacts (beginning with the Colorado River Compact of 1922) increased Colorado’s need to manage its apportioned
water to meet the needs of its growing population along the Front Range. Trans-basin diversions (primarily tunnels and canals)
were developed, under the Prior Appropriation Doctrine, to divert water from one watershed for conveyance to and use in another.
Mainly, water from the Colorado River Basin, west of the Continental Divide, was diverted east to meet the water needs along the
earlier developing Front Range by so-called “conservancy districts”. These projects began in the 1930’s and,
although many have been in operation for decades, some remain incomplete. Increasingly, further trans-basin diversions are limited
not only by competing appropriative water rights in the basins of origin but also by progressively stringent environmental restrictions.
Stymied
in their attempts to import additional surface water from distant watersheds, some municipalities and water providers began to
rely on inherently unsustainable ground water “mining” (depleting aquifers for current consumption at a rate in excess
of the rate at which natural recharge occurs). After decades of such ground water mining, many of the aquifers on the Front Range
have been severely depleted. Some municipalities also purchased farms with water diversion rights and then ceased irrigating the
farmland, transferring the water to their urban uses. Because neither the practice of ground water mining nor the practice of
“buying up and drying up” farmland is sustainable, Colorado law has placed limits and regulations on both practices.
Recognizing
the need for additional water sources along the Front Range, the Colorado Water Conservation Board published its
2050 Municipal
and Industrial Gap Analysis
in 2011
.
This report estimates that the Arkansas and South Platte Basins (essentially the
Front Range) will have a combined average annual supply shortage of 130,000 acre-feet of water by 2050. The difficulty and expense
of incremental trans-mountain diversions coupled with the unsustainability of ground water mining and agricultural-to-urban transfers—as
documented by the Colorado Water Conservation Board—motivates Front Range water purveyors to address the projected gap and
to identify and develop inherently scarce renewable sources of water.
As
early as 2005, the Colorado General Assembly created basin roundtables to convene regional water purveyors to address the looming
municipal supply gap. The roundtables were charged to identify “projects and methods to meet the consumptive and non-consumptive
needs of the basin.” (Colorado House Bill 05-1177). The potential solutions include Identified Plans and Process or IPPs,
Conservation, New Supply Development, and Alternatives to Agricultural Transfers.
The
Arkansas River Basin Roundtable has only a few IPPs to meet the water supply gap identified in its basin. The most significant
of the Arkansas Basin IPPs is the Southern Delivery System, an $800 million, 62-mile water supply pipeline and associated pumping
plants currently under construction by a consortium of four regional water purveyors including Colorado Springs. These purveyors
will use a portion of the capacity in the Southern Delivery System to transport water made available to each of them under their
respective contracts with the U.S. Bureau of Reclamation. The Southern Delivery System connects the U.S. Bureau of Reclamation’s
Pueblo Reservoir on the Arkansas River, the point of delivery under the U.S. Bureau of Reclamation contracts, with the purveyors’
service areas
In
order to address a portion of the identified gap between forecast supply and demand within the Arkansas Basin and to provide a
substitute source of water for Front Range communities that are too reliant on depleted ground water aquifers, the design and
planning for the Southern Delivery System anticipate that other water purveyors will subscribe for pipeline capacity to transport
renewable water supplies to their service areas.
Leasing
to Cannabis Growers
As
of December 31, 2017, 29 states, the District of Columbia, Guam and Puerto Rico allowed their residents to use medical marijuana
and voters in the States of Colorado, Washington, Oregon, Alaska, California, Nevada, Maine, Massachusetts and the District of
Columbia had approved and implemented regulations to legalize cannabis for recreational adult use. These state laws are in conflict
with the Federal Controlled Substances Act, which classifies marijuana as a Schedule I controlled substance and makes marijuana
use and possession illegal on a national level. The U.S. Supreme Court has ruled that the federal government has the right to
regulate and criminalize marijuana, even for medical purposes, and thus federal law criminalizing the use of marijuana preempts
state laws that legalize its use. On January 4, 2018, U.S. Attorney General Jeff Sessions issued a written memorandum rescinding
previous federal guidance to the effect that it was not an efficient use of resources to direct federal law enforcement agencies
to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. The memorandum
redirected U.S. prosecutors to enforce the Federal Controlled Substances Act. It is unclear at this time how strongly the federal
law will be enforced and which activities will be targeted for enforcement.
The
development of the GrowCo business model of constructing and leasing greenhouse space to licensed marijuana growers in states
where growing marijuana is legal is dependent on Colorado marijuana laws remaining in force and federal laws not being enforced.
If Colorado marijuana laws were not to remain in force or if federal marijuana laws were to be enforced, then GrowCo greenhouses
could be used to grow organic fruits and vegetables, in which case we estimate the cash flow to GrowCo would decrease by approximately
75% but would still be positive.
Legal
Proceedings
In
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
|
●
|
On
April 14, 2016 we were notified that Suncanna had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
|
|
●
|
This
suspension, in addition to non-payment of back due lease payments owed, caused Suncanna to be in violation of its lease with
GCP1. On April 25, 2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Due to the
eviction process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related Party,
wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. During the nine
months ended September 30, 2016, we recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna in
early April 2016. The total write off of $1.330 million was partially offset by a $350,000 reduction in the amount owed to
the GCP1 preferred unit holders. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate the greenhouse by September 6, 2016.
|
|
|
|
|
●
|
On
August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC, TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
|
|
|
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated and GCP1 took possession of the greenhouse
and began re-conditioning it for a new tenant, which began growing operations in December, 2016.
|
|
|
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this
decision.
|
|
|
|
|
●
|
On
June 29, 2017 a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed. Current a trial is set for October, 2018.
We believe this case is without merit and have filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna
lease agreement.
|
|
|
|
|
●
|
In
August, 2017, the Company was notified that three prior Company’s Board members
filed legal action against the Company to collect unpaid legal fees owed to outside legal
counsel for the prior Board members’ investigation of certain related party activities
by the Company. The Company has filed an answer. The total amount claimed by the prior
Directors is $139,000.
|
|
●
|
On
January 22, 2018, the Company was notified that the holder of $2.15 million of the GrowCo $4,000,000 notes is demanding early
payment. This was done via a court filing. GrowCo and GCP1 are in discussions to work out a payment plan with the holder.
The Company does not consider this to be a material event to the Company since in the near term, the cash flow to the Company
from GCP1 will not be significant.
|
The
Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders
have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County,
Colorado, and a demand by the State to breach the dam structure. (
Two Rivers Water and Farming Co. vs. Welton Land and Water
Co
., (Pueblo Water Court)). As part of the litigation, we have asked the court to deem certain water rights demands by the
neighboring water rights holders as wasteful. In the quarter ended March 31, 2016, we entered into a stipulation agreement with
the State, settling the State’s claims, whereby we agreed to take the existing dam structure down to the sediment level.
This is anticipated to occur in later 2017. We also intend to work with the Colorado State Engineer to construct a new dam close
to the prior dam structure, pending financing. The remainder of the litigation between Company and the neighboring water rights
holders awaits a trial setting.
On
August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey
Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services
rendered to the former board members at their behest while members of the board. At present, there are ongoing motions filed by
both parties that have not been ruled upon by the court. The $139,000 is included in our accounts payable on the balance sheet.
On
October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft.
At present, no response has been filed.
Properties
Our
corporate headquarters are located in Aurora, Colorado, where we lease 1,775 square feet of office space pursuant to a lease agreement
that will expire in April 2021. 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. Effective April 1,
2017, we subleased our former office space to McGrow, LLC, a related party, as described under “Related-Party Transactions.”
We
operate in the combined watershed area of the Huerfano River and Cucharas River in the Arkansas River Basin, an area encompassing
1,860 square miles on the southern Front Range in Colorado. As of December 31, 2017, we managed a total of 7,342 acres of land
that we acquired since 2009, as shown in the following table. Short-term (year-to-year) leases are not shown in the following
table.
|
|
Acres
Under Management As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Owned
|
|
|
Leased
|
|
|
Gross
|
|
|
Owned
|
|
|
Leased
|
|
|
Gross
|
|
Irrigable
farmland:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmed
|
|
|
421
|
|
|
|
-
|
|
|
|
421
|
|
|
|
421
|
|
|
|
552
|
|
|
|
973
|
|
Developed
but not farmed
|
|
|
725
|
|
|
|
-
|
|
|
|
725
|
|
|
|
725
|
|
|
|
-
|
|
|
|
725
|
|
Undeveloped
|
|
|
1,920
|
|
|
|
-
|
|
|
|
1,920
|
|
|
|
1,920
|
|
|
|
-
|
|
|
|
1,920
|
|
Total
irrigable land
|
|
|
3,066
|
|
|
|
-
|
|
|
|
3,066
|
|
|
|
3,066
|
|
|
|
552
|
|
|
|
3,618
|
|
Non-producing
land:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greenhouse
development
|
|
|
157
|
|
|
|
-
|
|
|
|
157
|
|
|
|
157
|
|
|
|
-
|
|
|
|
157
|
|
Grazing
land
|
|
|
3,342
|
|
|
|
-
|
|
|
|
3,342
|
|
|
|
4,512
|
|
|
|
-
|
|
|
|
4,512
|
|
Strategic
water holdings
|
|
|
411
|
|
|
|
-
|
|
|
|
411
|
|
|
|
411
|
|
|
|
-
|
|
|
|
411
|
|
Other
strategic holdings
|
|
|
400
|
|
|
|
-
|
|
|
|
400
|
|
|
|
400
|
|
|
|
-
|
|
|
|
400
|
|
Total
non-producing land
|
|
|
4,310
|
|
|
|
-
|
|
|
|
4,310
|
|
|
|
5,480
|
|
|
|
-
|
|
|
|
5,480
|
|
Totals
|
|
|
7,376
|
|
|
|
-
|
|
|
|
7,376
|
|
|
|
8,546
|
|
|
|
552
|
|
|
|
9,098
|
|
|
|
Acres
By Location as of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
County
(Colorado)
|
|
|
Owned
|
|
|
|
Leased
|
|
|
|
Gross
|
|
|
|
Owned
|
|
|
|
Leased
|
|
|
|
Gross
|
|
El
Paso
|
|
|
2,584
|
|
|
|
-
|
|
|
|
2,584
|
|
|
|
2,584
|
|
|
|
-
|
|
|
|
2,584
|
|
Huerfano
|
|
|
2,488
|
|
|
|
-
|
|
|
|
2,488
|
|
|
|
2,488
|
|
|
|
-
|
|
|
|
2,488
|
|
Pueblo
|
|
|
2,304
|
|
|
|
-
|
|
|
|
2,304
|
|
|
|
3,474
|
|
|
|
552
|
|
|
|
4,026
|
|
Totals
|
|
|
7,376
|
|
|
|
-
|
|
|
|
7,376
|
|
|
|
8,546
|
|
|
|
552
|
|
|
|
9,098
|
|
Employees
At
December 30, 2017, we had four full-time employees, all of whom were employed at our Aurora headquarters. None of our employees
are covered by a collective bargaining agreement. We consider our relationship with our employees to be satisfactory.
MANAGEMENT
Executive
Officers, Key Employees and Directors
Our
executive officers, key employees and directors, and their ages and positions as of February 9, 2018, are set forth below:
Name
|
|
Age
|
|
Position
|
Wayne
E. Harding III
|
|
63
|
|
Chief
Executive Officer, Interim Chief Financial Officer and Chairman of the Board
|
Samuel
Morris(1)(2)(3)
|
|
74
|
|
Director
|
Michael
Harnish(1)(2)
|
|
67
|
|
Director
|
James
Cochran(2)
|
|
57
|
|
Director
|
T.
Keith Wiggins(3)
|
|
77
|
|
Director
|
Christopher
Bragg(1)
|
|
34
|
|
Director
|
(1)
Member of Audit Committee.
(2)
Member of Compensation Committee.
(3)
Member of Governance and Nominating Committee.
Executive
Officers
Our
officers are elected by the board of directors at the first meeting after each annual meeting of our shareholders and they hold
office until their successors are duly elected and qualified under our bylaws.
The
directors named above will serve until the next annual meeting of our shareholders. Officers hold their positions at the pleasure
of the board of directors subject to the terms of employment agreements described below in “Item 11. Executive Compensation”
under the heading “Executive Compensation—Employment and Change in Control Agreements.” There is no arrangement
or understanding between our directors and officers and any other person pursuant to which any director or officer was or is to
be selected as a director or officer.
There
are no family relationships among any of the directors or executive officers. Neither of the executive officers is related by
blood, marriage or adoption to any of our other directors or executive officers.
Biographical
Information
Wayne
E. Harding III
has served as our Chief Executive Officer since June 2016 and as our interim Chief Financial Officer since
January 17, 2018. Mr. Harding previously served as our Chief Financial Officer from 2009 to March 2017 and as our controller from
2008 to 2009. He served as vice president business development of Rivet Software from 2004 to 2007. From 2002 to 2004 Mr. Harding
was the owner and President of Wayne Harding & Company PC, and from 2000 until 2002 he was director-business development of
CPA2Biz. Mr. Harding serves on the board of directors and head of the Audit Committee of AeroGrow International (OTCQB: AERO),
a public company that manufactures and markets soil-free indoor garden products. Mr. Harding holds an active CPA license in Colorado
and holds the CGMA (Charter Global Management Accountant) designation. Mr. Harding is past-President of the Colorado Society of
CPAs. He received his BS and MBA degrees from the University of Denver.
Samuel
Morris
has served as one of our directors since July 2016. Mr. Morris is the principal of Morris Law Associates which he formed
in 2006 after serving as general counsel to several companies. Through Morris Law, he has provided counsel on a variety of legal
matters, such as acquisitions, management buyouts, restructurings and personnel matters. From 2006 until 2010, he also was General
Counsel for Gichner Shelter Systems, Inc. Prior to Morris Law Associates, Mr. Morris was General Counsel of Wire One Communications,
Inc. (formerly V-SPAN), a full-service video conferencing company, as well as to a number of smaller companies, handling customer
and vendor contracts, employment matters, acquisitions and litigation from 2002 to 2005. In 2000-2001, he was Senior Vice President,
General Counsel and Secretary of Digital Access, LLC, a telecommunications broadband start-up. From 1993 to 2000, Mr. Morris was
Vice President/General Counsel/Secretary for Lenfest Communications, Inc., a public diversified cable television and entertainment
company. From 1985 to 1993, Mr. Morris was a Senior Partner of Hoyle, Morris & Kerr, a law firm that he co-founded. Prior
to that Mr. Morris was in private practice, primarily as a partner in the law firm of Dilworth, Paxson, Kalish and Kaufman. Mr.
Morris received his B.A. degree, cum laude, from Harvard College and his J.D. degree from the National Law Center of the George
Washington University in Washington, D.C.
Michael
Harnish
has served as one of our directors since July 2016. Officially retired, Mr. Harnish continues to serve as technology
consultant to the Examination Review Board responsible for the administration and content of the CPA exam since 1999. He is also
currently serving on the Board of Directors of Alliance Sports Group where he is chairman of the compensation committee as well
as a member of the audit and special committees. Mr. Harnish previously served on the Board of Directors of DeltaHawk Engines
where he was chairman of the audit committee. Prior to retirement, Mr. Harnish held the offices of COO/CIO of EthicsPoint, Inc.,Fios,
Inc., CPA2BIZ, and the law firm of Dickinson Wright PLLC. He has also served as President and CEO of Technology Consulting Partners
LLC and was a former Associate, Technology Consulting Solutions at Plante& Moran. Mr. Harnish is a former Partner of Crowe,
Chizek and Company CPAs (now Crowe Horwath LLP). Additionally, Mr. Harnish previously held the office of Director of Consulting
Services, Lotus Development Corp. and has been a member of Various AICPA Committees including the Computerization Implementation
Committee (CIC) and the first Chairman of the Information Technology Executive Committee and Membership Division. Mr. Harnish
is a former member of the Illinois CPA Society Board of Directors and recipient of the AICPA Innovative User of Technology and
the AICPA Sustained Contribution Awards. Mr. Harnish received his B.S. in Industrial Management with a Computer Science Technical
Option from Purdue University and has received the certifications of: Certified Public Accountant (CPA); Certified Information
Technology Professional (CITP); Certified in Financial Forensics (CFF); Certified Information Systems Auditor (CISA); EnCase Certified
Examiner (EnCE); and the Certificate in Data Processing (CDP).
James
D. Cochran
has served on our board since September 2016. Mr. Cochran is founder and Managing Principal of Aspen Capital Partners,
LLC, a privately held real estate investment, development, and asset management organization that focuses on all major real estate
asset classes across the investment risk spectrum. Mr. Cochran has over 32 years of leadership, investments, operations, and capital
markets experience with real estate firms in both the public and private sectors. He has had hands on operations, leasing, acquisitions,
and development roles with local, national, and international responsibilities and has also been instrumental in successfully
completing two IPO’s and raising private equity from national and foreign investors. He has served as President and Chief
Investment Officer for DCT Industrial Trust (NYSE: DCT), Board Member and member of the Executive Committee of Macquarie ProLogis
Trust, an Australian Listed Property Trust (ASX:MPR), and Senior Vice President and member of the Investment Committee for ProLogis
Trust (NYSE:PLD). Before joining ProLogis, Mr. Cochran worked at TCW Realty Advisors and Economics Research Associates. He is
the former Chairman of the Board of the Denver Street School, a non-profit high school in Denver. Mr. Cochran has a B.A. degree
from the University of California, Davis and an MBA from the Anderson School at UCLA. Mr. Cochran is 55 years old.
T.
Keith Wiggins
has served on our board since September 2016. Mr. Wiggins is one of the early investors in Two Rivers. He resides
in southern Colorado and operates a large cattle ranch. In 1995, Mr. Wiggins retired from Union Texas Petroleum Holdings, a Fortune
500 company, as vice president of human resources and environmental services. Prior to his tenure at Union Texas, Mr. Wiggins
was employed by Allied Chemical Corporation and held positions with increasing management responsibility in manufacturing, engineering,
human resources and labor relations. Mr. Wiggins has board experience with Lake Forrest Utility district and various community
entities. On February 2, 2006, Colorado governor, Bill Owens, appointed Mr. Wiggins to the 3rd Judicial Nominating Commission
of the State of Colorado Supreme Court. Mr. Wiggins received his B.S. degree from Auburn University and his Master of Agriculture
from Colorado State University, Fort Collins. He is a veteran of the U.S. Army and the National Guard.
Christopher
Bragg
has served on our board since September 2016. He has nearly fifteen years of experience in the financial industry. After
spending the first two years of his career in the private banking business, Mr. Bragg joined Western Asset Management as a Portfolio
Controller. He quickly transitioned over to the mutual fund operations group, where he supported the rollout and growth of the
newly formed Legg Mason and Western Asset managed mutual funds; the company had over $400 billion in assets under management at
the time. In 2007, Mr. Bragg transitioned over to the public equities side of the business and joined Camden Asset Management
as a Controller and Trade Support Specialist. He worked directly with the trading desk in the development and support of their
Convertible Arbitrage strategic side of the business. During his 5+ years with the company, Mr. Bragg played a crucial role in
a restructure of the operational/back office division, the buildout of a proprietary in-house trading system, and assisted in
the maintenance of the ever-changing compliance requirements for the $2 billion under management. He then spent just over a year
with Empire Capital Management; a technology focused hedge fund with $800 million under management across several funds. In his
time as a trading specialist and west coast operations manager, he assisted in the growth of the newly built west coast office
and implemented a multi-faceted trading platform that allowed traders on both coasts to input, execute and allocate orders across
the several fund accounts. In mid-2014, Mr. Bragg left Empire Capital Management to join the McGrain Financial group as a partner
in the overseeing of over $70 million in assets under management. He assists in the management of the day to day activities of
the investment portfolio, and is active in the local Pasadena community as well.
Corporate
Governance
Code
of Conduct
We
have adopted a written code of ethics that applies to directors, officers and employees, including the principal executive officer,
principal financial officer, principal accounting officer or controller, and persons performing similar functions. You can access
our code of conduct for our board in the “Investor” section of our website located at
www.2riverswater.com/investors
.
Employees’ (including officers and management) code of conduct is detailed in our employee handbook, which all employees
must sign. We post on our website all disclosures required by law concerning any amendments to, or waivers from, any provision
of the code. Our website and its contents are not incorporated into this report.
Board
Leadership Structure
The
chair of the board of directors is responsible for approving the agenda for each board meeting and for determining, in consultation
with the other directors, the frequency and length of board meetings. The board of directors does not have a policy on whether
or not the roles of chief executive officer and board chair should be separate and, if they are to be separate, whether the board
chair should be selected from the non-employee directors or be an employee. The board believes that it is preferable to evaluate
the appropriateness of separating these roles from time to time in light of the best interests of our company and our stockholders.
Wayne Harding, our chief executive officer, currently serves as the board chair.
Director
Nomination Process
The
process followed by the compensation, governance and nominating committee to identify and evaluate director candidates includes
requests to directors and others for recommendations, meetings from time to time to evaluate biographical information and background
material relating to potential candidates, and interviews of selected candidates by members of the compensation, governance and
nominating committee and the board of directors.
In
considering whether to recommend any particular candidate for inclusion in the board’s slate of recommended director nominees,
the compensation, governance and nominating committee applies the criteria set forth in our corporate governance guidelines. These
criteria include the candidate’s integrity, business acumen, knowledge of our business and industry, experience, diligence,
conflicts of interest and the ability to act in the interests of all stockholders. The board’s corporate governance guidelines
specify that the value of diversity on the board should be considered by the compensation, governance and nominating committee
in the director identification and nomination process. The compensation, governance and nominating committee seeks nominees with
a broad diversity of experience, professions, skills, geographic representation and backgrounds. The compensation, governance
and nominating committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite
for each prospective nominee. The board believes that the backgrounds and qualifications of its directors, considered as a group,
should provide a composite mix of experience, knowledge and abilities that will allow it to fulfill its responsibilities. Nominees
are not discriminated against on the basis of race, religion, national origin, sexual orientation, disability or any other basis
proscribed by law.
Stockholders
may recommend individuals to the compensation, governance and nominating committee for consideration as potential director candidates
by submitting their names, together with appropriate biographical information and background materials and a statement as to whether
the stockholder or group of stockholders making the recommendation has beneficially owned more than five percent of the common
stock for at least a year as of the date such recommendation is made, to the compensation, governance and nominating committee
in care of Two Rivers Water & Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014, Attention: Secretary.
Assuming that appropriate biographical and background material has been provided on a timely basis, the compensation, governance
and nominating committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying
substantially the same criteria, as it follows for candidates submitted by others.
Communicating
with Independent Directors
The
board of directors will give appropriate attention to written communications that are submitted by stockholders, and will respond
if and as appropriate. The director serving as chair of the compensation, governance and nominating committee, with the assistance
of our chief financial officer, is primarily responsible for monitoring communications from stockholders and for providing copies
or summaries to the other directors as such director considers appropriate.
Under
procedures approved by a majority of our independent directors, communications are forwarded to all directors if they relate to
important substantive matters and include suggestions or comments that the chief financial officer considers to be important for
the directors to know. In general, communications relating to corporate governance and corporate strategy are more likely to be
forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we receive repetitive
or duplicative communications.
Stockholders
who wish to send communications on any topic to the board should address such communications to the board in care of Two Rivers
Water & Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014, Attention: Secretary.
Compensation
Committee Interlocks and Insider Participation
The
members of the compensation committee are Samuel Morris, James Cochran and Michael Harnish. Neither Mr. Morris, Mr. Cochran nor
Mr. Harnish has ever been an officer or employee of our company or any subsidiary of ours or had any relationship with us during
2017 requiring disclosure under Item 404 of Regulation S-K of the SEC.
Our
executive officer has not served as a director or member of the compensation committee (or other committee serving an equivalent
function) of any other entity, one of whose executive officers served as a member of our board of directors or our compensation
committee.
Director
Attendance at Board and Shareholder Meetings
The
board of directors met formally multiple times during 2017, either in person or by teleconference. The board conducted
numerous special board meetings during 2017. Each director attended at least 90% of the meetings of the board held in 2016
during the period in which such person was a director.
We
do not have a policy regarding director attendance at our annual meetings of shareholders. Messrs. Morris, Harnish, Cochran, Wiggins
and Bragg all attended our annual meeting of shareholders held on September, 2016 and September, 2017.
Board
Committees
The
board of directors has established an audit committee, a compensation, and a governance and nominating committee.
Audit
Committee
Members
of the audit committee are Michael Harnish, Chris Bragg, and Samuel Morris. Mr. Harnish chairs the audit committee.
The
committee’s responsibilities include:
|
●
|
appointing,
approving the compensation of, and assessing the independence of our registered public accounting firm;
|
|
|
|
|
●
|
overseeing
the work of the registered public accounting firm, including through the receipt and consideration of certain reports from
such firm;
|
|
●
|
reviewing
and discussing our annual and quarterly financial statements and related disclosures with management and the registered public
accounting firm;
|
|
|
|
|
●
|
monitoring
our internal control over financial reporting, disclosure controls and procedures, and code of ethics, and overseeing risk
management;
|
|
|
|
|
●
|
establishing
policies regarding hiring employees from the registered public accounting firm and procedures for the receipt and retention
of accounting related complaints and concerns;
|
|
|
|
|
●
|
meeting
independently with our registered public accounting firm and management; and
|
|
|
|
|
●
|
reviewing
and approving or ratifying any related-person transactions.
|
The
audit committee met four times during 2017, either in person or by teleconference. During 2016, each member of the audit
committee attended at least 100% of the meetings of the committee held during the period in which such director was a member of
the audit committee.
Compensation
Committee
Members
of the compensation nominating committee are Michael Harnish, James Cochran and Samuel Morris. Mr. Morris chairs the compensation
committee.
The
compensation has the final determination in compensation for our executives. The compensation committee is responsible for considering
and approving the payment of bonuses to executives. There is no set schedule for the payment of bonuses. Bonuses are considered
upon achievement of specified benchmarks, which in the past have included capital and debt raises, operational performance, acquisitions
of significant assets, and entry into agreements accretive to our business. The benchmarks and the amount and type of bonuses
are determined by the committee.
The
compensation committee also is responsible for approving employment agreements with executives.
The
Compensation Committee met once during 2017.
Nominating
and Governance Committee
Members
of the governance and nominating committee are Samuel Morris and Keith Wiggins. Mr. Morris chairs the committee.
The
governance and nominating committee is responsible for identifying individuals whom the Committee believes are qualified to become
board members in accordance with the nominating criteria set forth below, and recommend that the board select such individuals
as nominees to stand for election at each Annual Meeting of Shareholders. In addition, the committee will annually evaluate the
qualifications and performance of incumbent directors and determine whether to recommend them for re-election to the board. In
the case of a board vacancy (including a vacancy created by an increase in the size of the board), the committee is responsible
for recommending to the board in accordance with the nominating criteria an individual to fill such vacancy either through election
by the board or through election by shareholders. The Governance and Nominating Committee met once during 2016.
Summary
of Committee Service
The
following is a table showing board members involvement in each committee:
Name
|
|
Audit
|
|
Compensation
|
|
Nominating/Governance
|
Wayne
Harding
|
|
-
|
|
-
|
|
-
|
Samuel
Morris
|
|
M
|
|
C
|
|
C
|
Michael
Harnish
|
|
C
|
|
M
|
|
-
|
James
Cochran
|
|
-
|
|
M
|
|
-
|
T.
Keith Wiggins
|
|
-
|
|
-
|
|
M
|
Christopher
Bragg
|
|
M
|
|
-
|
|
-
|
M
= Member C = Chair
Limitations
on Liability and Indemnification Matters
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or controlling
persons, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
DIRECTOR
COMPENSATION
Fiscal
Year 2016 Director Compensation
The
following table sets forth information concerning compensation paid to our outside directors for services during 2016:
Name
|
|
Fees
earned or paid in cash
|
|
|
Stock
award
|
|
|
Total
|
|
John
Stroh (former director)
|
|
|
-
|
|
|
$
|
8,303
|
|
|
$
|
8,303
|
|
Dennis
Channer (former director)
|
|
|
-
|
|
|
$
|
11,071
|
|
|
$
|
11,071
|
|
Gregg
Campbell (former director)
|
|
|
-
|
|
|
$
|
7,300
|
|
|
$
|
7,300
|
|
Rockey
Wells (former director)
|
|
|
-
|
|
|
$
|
4,907
|
|
|
$
|
4,907
|
|
Samuel
Morris
|
|
$
|
5,000
|
|
|
$
|
6,227
|
|
|
|
11,227
|
|
Michael
Harnish
|
|
$
|
5,000
|
|
|
$
|
1,954
|
|
|
$
|
6,954
|
|
James
Cochran
|
|
$
|
5,000
|
|
|
|
-
|
|
|
$
|
5,000
|
|
T.
Keith Wiggins
|
|
$
|
5,000
|
|
|
|
-
|
|
|
$
|
5,000
|
|
Christopher
Bragg
|
|
$
|
5,000
|
|
|
|
-
|
|
|
$
|
5,000
|
|
Since
September 30, 2016, each outside director receives $1,000 for each meeting attended in person. Directors are also paid $4,000
per calendar quarter. For each year of service, an outside director receives 100,000 options for shares of common stock. Director
stock option shares vest equally over eight quarters. The chair of the audit committee receives an additional 10,000 stock options
per year. The chair of the compensation committee receives an additional 5,000 shares of common stock per year. Committee chair
options vest half immediately, half in six months.
In
2016, we expensed RSU stock compensation for the following shares of common stock: Dennis Channer, 20,000 shares; Gregg Campbell,
10,000 shares; John Stroh, 15,000 shares; Rockey Wells, 8,333 shares; Samuel Morris 7,500 shares; Michael Harnish 7,500 shares.
In
2016, we expensed stock option compensation for the following shares of common stock: Samuel Morris 150,000 shares; Michael Harnish
150,000 shares; James Cochran 100,000 shares; T. Keith Wiggins 100,000 shares; Christopher Bragg 100,000 shares. These shares
vest over two years and are expensed over that period.
EXECUTIVE
COMPENSATION
Executive
Compensation
Summary
Compensation Table for 2016
The
following table sets forth certain information concerning compensation paid to each of the individuals who served as executive
officers during 2016:
SUMMARY
COMPENSATION TABLE
Name
& Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)(1)
|
|
|
Option
Awards ($)
|
|
|
Non-equity
incentive plan comp ($)
|
|
|
Non-qualified
deferred comp earnings ($)
|
|
|
All
other comp ($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
McKowen,
|
|
|
2016
|
(2)
|
|
|
192,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,361
|
(3)
|
|
|
204,525
|
|
Former
CEO
|
|
|
2015
|
|
|
|
258,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,284
|
(4)
|
|
|
296,334
|
|
|
|
|
2014
|
|
|
|
281,400
|
|
|
|
-
|
|
|
|
245,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,284
|
(4)
|
|
|
557,684
|
|
Wayne
Harding,
|
|
|
2016
|
|
|
|
131,379
|
|
|
|
-
|
|
|
|
33,093
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,050
|
(6)
|
|
|
170,522
|
|
CEO(5)
|
|
|
2015
|
|
|
|
154,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,800
|
(6)
|
|
|
161,031
|
|
|
|
|
2014
|
|
|
|
136,200
|
|
|
|
-
|
|
|
|
81,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,800
|
(6)
|
|
|
222,667
|
|
|
(1)
|
Stock
award compensation is based on stock options or RSUs granted, vested and issued during the year. For payroll tax purposes,
and as reported here, valuation of the RSU grants that are vested is recorded through payroll at a 25% fair value discount
due to large blocks and limitations on selling. This is based on outside executive compensation consultant’s opinion.
For financial statement purposes, the full fair value of the grant is recorded, less expected forfeitures.
|
|
|
|
|
(2)
|
Mr.
McKowen resigned in May 2016.
|
|
|
|
|
(3)
|
Consists
of payment of health insurance benefit ($2,361) and office allowance ($10,000).
|
|
|
|
|
(4)
|
Consists
of payment of health insurance benefit ($13,284) and office allowance ($25,000).
|
|
|
|
|
(5)
|
Mr.
Harding became Chief Executive Officer in June 2016 and was named Interim Chief Financial Officer effective February 9,
2018
|
|
|
|
|
(6)
|
Consists
of payment of health insurance benefit.
|
Grants
and Issuance of Plan-Based Awards for 2016 and 2015
For
the year ended December 31, 2016, the Company issued 600,000 options to purchase shares of common stock to Wayne Harding, 200,000
with immediate vesting, 400,000 with vesting in future years.
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth certain information as to unexercised restricted stock units held on December 31, 2016 by the named
executive officer.
|
|
Stock
Awards
|
|
Name
|
|
|
Number
of Options that have vested (#)
|
|
|
|
Market
value of Options that have vested ($)(1)
|
|
|
|
Options
that have not vested (#)
|
|
|
|
Market
value of stock options that have not vested ($)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
Harding
|
|
|
200,000
|
|
|
$
|
80,000
|
|
|
|
400,000
|
|
|
$
|
160,000
|
|
(1)
|
The
closing price of our common stock on OTCQB on December 31, 2016 was $0.59
|
Option
Exercises and Stock Vested in 2016
Mr.
Harding, our sole executive officer has no RSU holdings. In 2016 he was granted 600,000 stock options, 200,000 of which vested
immediately with the remainder vesting in future years. In September of 2017 he was granted 225,000 stock options, 64,286 of which
vested immediately with the remainder vesting in future years.
Employment
and Change in Control Agreements
We
entered into a revised employment agreement with Mr. Harding effective as of August 30, 2017. This employment agreement renews
automatically for successive one-year terms until either party delivers notice of termination within 30 days of the expiration
of the then-current term.
Under
each agreement, annual base salary and other compensation is to be reviewed, and may be adjusted upward, no less frequently than
quarterly. Mr. Harding’s annual base salary has been $120,000 per year until November 2016, when his salary was increased
to $150,000 per year.
The
employment agreement provides that executive officer party thereto will be entitled, in the event his employment is terminated
during the term by us without cause (as defined) or by him for good reason (as defined), to (a) receive an amount in cash equal
to six months’ base salary at the highest base salary in effect during the twelve months prior to termination plus the amount
of the annual bonus, if any, paid to him for the preceding fiscal year, prorated to the termination date and (b) immediate vesting
of all non-vested stock options. The agreement provides for immediate vesting of all non-vested stock options in the event of
a change in control, which generally is defined to be a sale or other disposition to a person, entity or group of 50% or more
of our consolidated assets. The following table sets forth estimated compensation that would have been payable to our executive
officers upon termination of employment, assuming termination took place on December 31, 2016, whether in connection with a change
in control or otherwise. Mr. Harding held unvested options as of December 31, 2016, and therefore would have been entitled to
additional compensation had a change in control occurred as of December 31, 2017.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
Name
|
|
Acceleration
of Compensation Upon Change of Control
|
|
|
Acceleration
of Compensation Upon Termination
|
|
Wayne
Harding
|
|
$
|
150,000
|
|
|
$
|
75,000
|
|
Equity
Plans
2011
Long-Term Stock Incentive Plan
In
2011 the board of directors adopted the 2011 Long-Term Stock Incentive Plan, or the 2011 Plan. The 2011 Plan and we expect our
stockholders to approve the 2016 Plan prior to the completion of this offering. The 2016 Plan became effective immediately on
adoption.
Share
Reserve
: 10,000,000 shares of common stock.
Participation
:
All employees may participate while employed with by us or any of our subsidiaries.
Administration.
The 2016 Plan may be administered by the board of directors or its compensation committee. The compensation committee, in
its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted, and
the terms of such awards.
Types
of Awards.
The 2016 Plan permits the granting of any or all of option, stock appreciation right, restricted stock award, restricted
stock unit awards, performance awards, other stock-based award or performance compensation award.
Purchase
of Securities Pursuant to the Plan and Payment for Securities Offered
:
|
●
|
Participation
is allowed at the market price per share, or in amounts to be set by the board.
|
|
|
|
|
●
|
Payment
for the securities purchased may only be in cash or through services.
|
|
|
|
|
●
|
Employees
are not required to contribute to the 2011 Plan.
|
|
|
|
|
●
|
Employees
and the registrant are not required to contribute to the 2011 Plan.
|
|
|
|
|
●
|
Reports
are not made to employees participating in the 2011 Plan, and the Plan does not hold assets for employees’ accounts.
|
|
|
|
|
●
|
Securities
will not be purchased for the 2011 Plan in either the open market or through private transactions.
|
Resale
Restrictions
: There are no resale restrictions on plan participants, except in the event the participant is an officer, director
or affiliate, or in the event that the 2011 Plan contains a repurchase right of issuer, for any stock, or options, as a pre-condition
of resale.
Tax
Effects of 2011 Plan Participation
: Participants will be taxed upon any shares issued for services provided or for awards.
Participants will not be taxable on stock options issued to employees at the market price on date of grant.
Investment
of Funds
: No assets are held under the 2011 Plan.
Withdrawal
from the 2011 Plan; Assignment of Interest
:
|
●
|
Employees
may refuse to accept compensation or options.
|
|
|
|
|
●
|
No
assignment of an interest in the 2011 Plan is possible; stock or options received under the 2011 Plan may be assigned, subject
to the terms of the 2011 Plan, including the Right to repurchase as defined therein.
|
Forfeitures
and Penalties
: Except as otherwise determined by the 2011 Plan administrator, at the time of the award, upon termination of
a participant’s continuous service during the applicable restriction period, the participant’s restricted stock, that
is at that time subject to restrictions shall be forfeited and reacquired by us; provided that the 2011 Plan administrator may
provide, by rule or regulation or in any award agreement, or may determine in any individual case, that restrictions or forfeiture
conditions relating to restricted stock shall be waived in whole or in part in the event of terminations resulting from specified
causes, and the 2011 Plan administrator may in other cases waive in whole or in part the forfeiture of restricted stock.
Term,
Termination and Amendment of 2011 Plan.
Unless terminated earlier by the board of directors, the 2011 Plan will terminate,
and no further awards may be granted, ten years after the date on which it is approved by our stockholders. The board may amend,
suspend or terminate the 2011 Plan at any time, except that, if required by applicable law, regulation or stock exchange rule,
stockholder approval will be required for any amendment. The amendment, suspension or termination of the 2011 Plan or the amendment
of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights
under an outstanding award.
2005
Stock Option Plan
On
May 6, 2005, the board of directors adopted the 2005 Stock Option Plan, the 2005 Plan, pursuant to which the board may grant options
to purchase a maximum of 5,000,000 shares of common stock to key employees, directors and consultants. The option plan only provides
for the grant of nonqualified stock options. The 2005 Plan was superseded by the 2011 Plan.
The
board of directors adopted our 1998 Stock Option Plan, or the 1998 Plan, in April 1998We previously adopted our 2005 Stock Option
Plan, or the 2005 Plan. The 2005 Plan was superseded by the 2011 Plan. The 1998 Plan was amended by the board in May 1999, December
2001 and March 2004, and those amendments were approved by our stockholders. No additional options may be granted pursuant to
the 1998 2005 Plan, but the 1998 2005 Plan will continue to govern the terms and conditions of the outstanding options previously
granted thereunder.
RELATED-PARTY
TRANSACTIONS
The
following is a description of transactions since January 1, 2016 to which we have been a party, in which the amount involved exceeded
or will exceed $120,000, and in which any of our directors, executive officers or beneficial owners of more than 5% of any series
or class of our preferred or common stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect
material interest, other than compensation, termination and change-in-control arrangements.
Since
January 1, 2016 there have been the following related-party transactions, except for the compensation arrangements described under
“Executive Compensation” and “Director Compensation”:
|
●
|
Wayne
Harding, Chief Executive Officer and Chief Financial Officer
|
|
|
|
|
|
|
–
|
Short-term
loan to the Company of $5,000.
|
|
|
|
|
|
|
–
|
Short-term
loan to the Company of $27,000.
|
|
|
|
|
|
|
–
|
Invested
$25,000 in GCP1 preferred units.
|
|
|
|
|
|
|
–
|
Invested
$100,000 in the GrowCo $4 million note.
|
|
|
|
|
|
●
|
Board
Members
|
|
|
|
|
|
|
–
|
Samuel
Morris $5,000 short-term loan to the Company.
|
|
|
|
|
|
|
–
|
Michael
Harnish invested $35,000 in the GrowCo $6M Exchange Note prior to becoming a board member.
|
|
|
|
|
|
●
|
Thomas
Prasil, greater than five percent shareholder
|
|
|
|
|
|
|
–
|
Invested
$400,000 in the GrowCo $6M Exchange Note.
|
The
following related party transactions have taken place with John McKowen our former chief executive officer, during the year ended
December 31, 2016 (Mr. McKowen ceased to be our chief executive officer as of May 25, 2016):
|
●
|
In
August 2016 TR Capital Partners, LLC’s subsidiary GCP1 signed a lease agreement for greenhouse 1 with Johnny Cannaseed,
a company formed and operated by John McKowen.
|
|
|
|
|
●
|
In
August 2016, the Company’s subsidiary GCP2 signed a lease agreement for greenhouse 2 with Johnny Cannaseed.
|
|
●
|
In
July 2016 the Company’s subsidiary GrowCo signed a series of agreements with McGrow, LLC, a Colorado limited liability
company that is headed and partially owned by John McKowen. The agreements included a Master Agreement, and Advisory Services
agreement, a Construction Services agreement, a Financing Services agreement, a Non-Compete and Exclusivity agreement, and
a Stock Purchase Agreement. Collectively these are known as the “McGrow Agreements”. As a result of these agreements
GrowCo paid McGrow for services provided primarily for the construction of greenhouses and fees associated with the raising
of capital.
|
|
|
|
|
●
|
Johnny
Cannaseed, LLC
|
|
|
–
|
Advance
of $33,599 for expenses incurred for greenhouse supplies. Recorded as a related party receivable on balance sheet.
|
|
|
|
|
|
|
–
|
Revenue
recorded of $178,609 for greenhouse lease. Recorded as a related party receivable on balance sheet.
|
|
|
|
|
|
●
|
McGrow,
LLC
|
|
|
|
|
|
|
–
|
Advance
of $8,295 for services rendered.
|
|
|
|
|
|
|
–
|
Advance
of $5,000 for services rendered.
|
|
|
|
|
|
|
–
|
Expense
payment of $374,526 for services rendered.
|
|
|
|
|
|
|
–
|
Fees
paid of $107,250 for financing services.
|
|
|
|
|
|
|
–
|
Advance
of $12,548 for services rendered.
|
|
|
|
|
|
|
–
|
We
entered into a subleasing agreement whereby McGrow will pay $47,000 per year for office space leased by us.
|
|
|
|
|
|
●
|
John
McKowen, individually
|
|
|
|
|
|
|
–
|
Interest
expense of $85,630 on investment into GCP Super Units.
|
|
|
|
|
|
|
–
|
Payment
of office space of $ 29,458 while CEO of Two Rivers.
|
|
|
|
|
|
|
–
|
Equity
investment of $496,000 in GCP Super Units.
|
|
|
|
|
|
|
–
|
Equity
compensation in the form of GrowCo common shares valued at $10,000 for services provided.
|
|
|
|
|
|
|
–
|
Fees
of $71,864 for GrowCo capital raised.
|
During
the Twelve Months Ended December 31, 2017 the following related party transactions occurred:
|
–
|
Wayne
Harding, Company CEO provided a short term loan to the Company of $25,000. The loan is secured by land assets of the Company
and carried an interest rate of 12%. The loan was paid off in the third quarter of 2017.
|
|
|
|
|
–
|
Advances
totaling $34,400 resulting in a cumulative total of $72,999 for greenhouse expenses to Johnny Cannaseed, LLC which is majority
owned by former Company CEO John McKowen.
|
|
|
|
|
–
|
Revenue
totaling $2.9M has been recorded for leasing income from Johnny Cannaseed for the nine months ending 9/30/17
|
|
–
|
Accounts
Receivable (AR) due from Johnny Cannaseed for the quarter ending 9/30/17 was $1.1M, with total outstanding AR $2.8M.
|
|
|
|
|
–
|
Advances
totaling $26,957 resulting in a cumulative total of $43,798 for greenhouse expense to McGrow, LLC which is partially owned
by former Company CEO John McKowen.
|
|
|
|
|
–
|
Payments
totaling $335,531 to MCG Services, LLC which is majority owned by former Company CEO John McKowen for costs associated with
a services agreement with GrowCo.
|
|
|
|
|
–
|
Advances
to MCG Services, LLC total $13,295
|
|
|
|
|
–
|
Payments
totaling $11,210 to John McKowen for interest expense on a loan held by Mr. McKowen to GrowCo.
|
|
|
|
|
–
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have invested approximately $11.0M in GrowCo
securities.
|
|
|
|
|
–
|
The
Chief Executive Officer of Two Rivers serve as the only members of the Sunset Metropolitan District (Sunset). Sunset is a
quasi-governmental agency operating under Title 32 of the State of Colorado Constitution. As of September 30, 2017, the Company
had advanced $80,000 to Sunset.
|
|
|
|
|
–
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed.
|
|
|
|
|
–
|
The
Company leases its former corporate headquarters office space to Johnny Cannaseed. Total lease payments are $47,000 per year.
|
|
|
|
|
–
|
Wayne
Harding, Company CEO provided a long-term loan to the Company of $50,000. The loan is secured by land assets of the Company
and carries an interest rate of 18%.
|
|
|
|
|
–
|
Wayne
Harding, Company CEO provided a short-term loan to the Company of $12,500. The loan is initially unsecured but will become
secured if not paid within 30 days of the note by land assets of the Company, and carries an interest rate of 18%.
|
PRINCIPAL
AND SELLING SHAREHOLDERS
Transactions
with Selling Shareholders
Powderhorn
On February 9,
2018, we entered into a securities purchase agreement with Powderhorn, LLC, or Powderhorn, pursuant to which we
issued to Powderhorn a 12.5% original issue discount convertible promissory note, or the Note, in the principal amount
of $675,000 in exchange for $600,000 in cash.
We have filed the registration
statement of which this prospectus forms a part in order to register the sale of up to 8,000,000 shares of common stock by Powderhorn.
Under the securities purchase agreement with Powderhorn, we have agreed to use our reasonable best efforts to have the registration
statement declared effective by the SEC by April 11, 2018. Subject to certain permitted exceptions, if we fail to meet
the filing deadline or to keep the registration statement effective, we will be required to pay liquidated damages to Powderhorn.
The Note, which is due
on February 9, 2019, bears interest at the rate of 12.5% per annum. The Note is subordinated in payment. All principal
of, and accrued interest on, the Note is convertible at any time, at Powderhorn’s election, into shares of common stock
at a conversion price equal to $0.30. We have the right to prepay all or any portion of the Note at any time upon ten days’
written notice to Powderhorn. For the purpose of securing our obligations under the Note, TR El Paso Land, LLC, our wholly owned
subsidiary, granted a deed of trust conveying certain property to Powderhorn and a limited recourse guarantee in favor of Powderhorn.
The Note contains customary default events that, if triggered and not timely cured, will result in default interest and penalties.
Beginning on March 6,
2018 and on the same day of each and every calendar month thereafter for a period of twelve months (each an “
Amortization
Payment Date
”), we will make monthly payments under the Note to Powderhorn in the amount of $63,000, consisting
of one-twelfth of the principal balance and all accrued but unpaid interest under the Note (each an “
Amortization Payment
”).
Each
Amortization Payment shall, at the option of the Company, (i) be made in cash in an amount equal to 1.05 multiplied by the Amortization
Payment (the “
Cash Amortization Payment Rate
”) or, (ii) subject to the Company complying with the Equity Conditions
(as defined in the Note), be made in Common Stock, in whole or in part at the sole discretion of Powderhorn, by applying
the Amortization Conversion Price (as defined below) as of the date of issuance of the Common Stock. In the event that Powderhorn
is receiving any Amortization Payment in the form of Common Stock, the Common Stock issuable in satisfaction of such Amortization
Payment will not be issued until such time as Powderhorn has requested such issuance, and the Amortization Conversion Price
will be applied as of the date of such request by Powderhorn for issuance of Common Stock. Powderhorn may request
an unlimited amount of issuances of Common Stock as partial payment totaling the sum of such Amortization Payment. Notwithstanding
the foregoing, Powderhorn may, (i) by delivering written notice to the Company at least ten (10) Trading Days prior to
an Amortization Payment Date (the “Acceleration Notice”), require that up to a total of three (3) Amortization Payments
be made on such Amortization Payment Date (including the Amortization Payment scheduled to be made on such Amortization Payment
Date), each of which Amortization Payments severally shall be payable, at the option of the Company, in cash at the Cash Amortization
Payment Rate or, subject to the Company complying with the Equity Conditions, in Common Stock by applying the Amortization Conversion
Price or (ii) in Powderhorn’s sole discretion, Powderhorn may at any time after an Amortization Payment Date,
require that up to two (2) additional Amortization Payments be made, provided that the entire amount of such two additional Amortization
Payments will be made in Common Stock, in such amounts and at such times as the Holder will request in the Holder’s sole
discretion, by applying the applicable Amortization Conversion Price at the time of issuance, in accordance with the foregoing.
Powderhorn may exercise its rights set forth in the preceding sentence with respect to an unlimited number of Amortization
Payment Dates, until all Amortization Payments have been made, and any Amortization Payment or Payments for which payment is accelerated
pursuant to the preceding sentence shall be deemed to apply to the latest Amortization Payment Date.
Any
amount of principal or interest on the Note, which is not paid by the maturity date, shall be repaid at 110% of such unpaid amount.
Interest shall commence accruing on the date that the Note is issued and shall be computed on the basis of a 360-day year and
the actual number of days elapsed.
In
no event shall Powderhorn be entitled to convert any portion of the Note if such conversion would result in beneficial
ownership by Powderhorn and its affiliates of more than 4.99% of the outstanding shares of our common stock, on an as converted
basis. For purposes of the preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, except that the limitations on conversion may be waived (up to a maximum of 9.99%) by Powderhorn
upon not less than 61 days’ prior notice to us, and the provisions of the conversion limitation shall continue to apply
until such sixty-first day.
Principal
and Selling Shareholders
The
following table sets forth information regarding the beneficial ownership of common stock as of January 22, 2018, by:
|
●
|
each
person, or group of affiliated persons, who is known by us to own beneficially more than five percent of the outstanding shares
of common stock;
|
|
|
|
|
●
|
each
of our directors;
|
|
|
|
|
●
|
each
of our executive officers;
|
|
|
|
|
●
|
all
of our directors and executive officers as a group; and
|
|
|
|
|
●
|
each
selling shareholder
|
The
following table lists the percentage of shares beneficially owned as of January 22, 2018, based on 32,937,045 shares of common
stock outstanding. Beneficial ownership is determined in accordance with the rules of the SEC, and thus it represents sole or
shared voting or investment power with respect to shares of common stock. Shares of common stock subject to options currently
exercisable or exercisable by March 23, 2018 (sixty days after January 22, 2018) are deemed outstanding and beneficially owned
by the person holding such options for purposes of computing the number of shares and percentage beneficially owned by such person,
but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated
in the footnote to the below table, and subject to applicable community property laws, the persons named have sole voting and
investment power with respect to all shares of common stock shown as beneficially owned by them.
|
|
Shares
Beneficially Owned Before this Offering
|
|
|
Shares
Beneficially Owned After this Offering
|
|
Name
of Beneficial Owner
|
|
Number
|
|
|
Percentage
|
|
|
Number
|
|
|
Percentage
|
|
5%
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
R. McKowen
456 Madison Street
Denver, Colorado 80206
|
|
|
3,972,813
|
|
|
|
12.2
|
%
|
|
|
3,972,813
|
|
|
|
11.2
|
%
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne
Harding(1)
|
|
|
1,204,518
|
|
|
|
3.7
|
|
|
|
1,204,518
|
|
|
|
3.4
|
|
Samuel
Morris
|
|
|
466,435
|
|
|
|
1.4
|
|
|
|
466,435
|
|
|
|
1.3
|
|
Michael
Harnish
|
|
|
221,786
|
|
|
|
*
|
|
|
|
221,786
|
|
|
|
*
|
|
James
Cochran
|
|
|
406,502
|
|
|
|
1.2
|
|
|
|
406,502
|
|
|
|
1.1
|
|
T.
Keith Wiggins
|
|
|
429,403
|
|
|
|
1.3
|
|
|
|
429,403
|
|
|
|
1.2
|
|
Christopher
Bragg
|
|
|
140,787
|
|
|
|
*
|
|
|
|
140,787
|
|
|
|
*
|
|
All
directors and executive officers as a group (6 persons)(1)
|
|
|
2,869,431
|
|
|
|
8.7
|
|
|
|
2,869,431
|
|
|
|
8.1
|
|
Selling
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powderhorn,
LLC(2)(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
8
,000,000
|
|
|
|
19.5
|
|
|
*
|
Less than 1%.
|
|
(1)
|
Includes (a) 6,666
shares owned by an individual retirement account for the benefit of Mr. Harding’s spouse and (b) 150,000 shares that
may be acquired by Mr. Harding pursuant to options vested as of March 23, 2018 (sixty days after January 22, 2018).
|
|
(2)
|
Powderhorn is a Delaware limited liability company.
Mr.
Marc Manuel is the managing
member of the manager of Powderhorn, R3 Equity LLC,
and
has sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of all securities owned directly
by Powderhorn.
The business address of Powderhorn is c/o Lucosky Brookman LLP, 101 Wood Avenue South 5
th
Floor,
Iselin, NJ.
|
|
(3)
|
Consists of up to
8,000,000 shares of common stock issuable to Powderhorn upon conversion of the Note. The Note is subject to a blocker
provision which prevents Powderhorn from converting the note into shares of common stock if its beneficial ownership
of the common stock would exceed 4.99% (subject to adjustment not to exceed 9.99%) of our common stock outstanding. Powderhorn
would beneficially own 19.5% of our issued and outstanding common stock without giving effect to this blocker.
|
For
purposes of the table above, the address of each of our directors and executive officers is in care of Two Rivers Water &
Farming Company, 3025 S. Parker Road, Suite 140, Aurora, Colorado 80014.
DESCRIPTION
OF CAPITAL STOCK
General
Our
authorized capital stock consists of 200,000,000 shares of common stock, $0.001 par value per share and 4,000,000 shares of preferred
stock, $0.001 par value per share. The following description does not purport to be complete.
As
of January 22, 2018, there were outstanding:
|
●
|
32,937,045 shares
of common stock outstanding, held of record by 5,583 stockholders;
|
|
|
|
|
●
|
3,036,500 shares of
common stock issuable upon exercise of outstanding stock options; and
|
|
|
|
|
●
|
244,000 restricted
stock units, or RSUs, covering 244,000 shares of common stock.
|
Common
Stock
Voting
Rights
: Each share of common stock is entitled to one vote on all matters presented to stockholders. Stockholders do not have
the ability to cumulate votes for the election of directors.
Dividends
.
Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of our outstanding shares of
common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of
legally available funds. At present, we have no plans to issue dividends. See “Dividend Policy.”
Liquidation
.
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net
assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject
to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Other
Rights and Preferences
. Other than as described above, holders of common stock have no preemptive, conversion or subscription
rights, and there are no redemption or sinking fund provisions applicable to common stock. The rights, preferences and privileges
of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series
of preferred stock that we may designate and issue in the future.
Fully
Paid and Nonassessable
. All of our outstanding shares of common stock are fully paid and nonassessable.
Preferred
Stock
We
currently have 10,000,000 shares which are authorized as preferred stock. 6,000,000 preferred shares are currently authorized
but have not been designated. 4,000,000 preferred shares were designated in 2013 as Series BL Convertible Preferred Stock. 3,794,000
shares of Series BL preferred stock were issued, and all such issued shares of Series BL preferred stock have been retired. No
shares of Series BL preferred stock are currently outstanding, and the Company has no plans to ever issue any additional shares
of Series BL preferred stock.
The
board of directors is authorized to issue preferred stock in one or more series, to establish the number of shares to be included
in each such series and to fix the designation, powers, preferences and rights of such shares and any qualification, limitations
or restrictions thereof. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in
control of our company without further action by the stockholders and may adversely affect the voting and other rights of the
holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power
of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any preferred
stock.
Options
As
of February 9, 2018, there were outstanding options to purchase 5,917,315 shares of common stock at a weighted-average
exercise price of $0.47 per share, and restricted stock units covering 133,000 shares of common stock.
Warrants
As
of February 9, 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
|
|
HCIC
Note Holders
|
|
Creditors
|
|
|
473,750
|
|
|
|
Jun-13
|
|
|
|
Jun-13
|
|
|
|
Jun-18
|
|
|
$
|
3.00
|
|
TR
Capital Partners, LLC
|
|
Investors
|
|
|
14,168,944
|
|
|
|
2014
|
|
|
|
2014
|
|
|
|
Jan-19
|
|
|
$
|
2.10
|
|
GrowCo
Exchange Note
|
|
Creditors
|
|
|
700,000
|
|
|
|
Apr-16
|
|
|
|
Apr-16
|
|
|
|
May-21
|
|
|
$
|
0.50
|
|
Two
Rivers
|
|
Financial
Advisor
|
|
|
15,000
|
|
|
|
Apr-17
|
|
|
|
Apr-17
|
|
|
|
Apr-22
|
|
|
$
|
0.58
|
|
Two
Rivers
|
|
Creditors
|
|
|
390,634
|
|
|
|
Apr-17
|
|
|
|
Apr-17
|
|
|
|
Apr-22
|
|
|
$
|
0.27
|
|
Two
Rivers
|
|
Creditors
|
|
|
275,000
|
|
|
|
Aug-17
|
|
|
|
Aug-17
|
|
|
|
Aug-22
|
|
|
$
|
0.35
|
|
Two
Rivers
|
|
Creditors
|
|
|
140,000
|
|
|
|
Sep-17
|
|
|
|
Sep-17
|
|
|
|
Sep-22
|
|
|
$
|
1.00
|
|
|
|
|
|
|
16,463,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Priced
at the same price per share as the expected equity offering and expire one year after the completion of the expected equity
offering.
|
Registration
Rights
Under
the exchange agreement dated as of January 31, 2014 that we entered into with TR Capital Partners, LLC, or TR Capital, we granted
holders of preferred units in TR Capital a one-time demand registration rights under which we may be required to file a registration
statement covering shares of common stock (including shares subject to warrants) issued or issuable upon exchanges of TR Capital
preferred units. As of February 9, 2018, we could be required to issue and deliver to holders of outstanding TR Capital
preferred units, upon exchange, up to 29,963,378 shares of common stock together with warrants to purchase up to an additional
14,168,944 shares of common stock.
With
the exception of the registration rights related to those listed above, no Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the Company or any Subsidiary.
The
Company has no additional registration rights.
Anti-Takeover
Effects of Certain Provisions of Colorado Law, Our Articles of Incorporation and Bylaws
Colorado
corporation law, our Articles of Incorporation and our Bylaws contain a number of provisions that could make our acquisition by
means of a tender or exchange offer, a proxy contest or otherwise more difficult. These provisions are summarized below.
|
●
|
Shareholder
Action by Written Consent. Our Bylaws provide that shareholders may take action in writing only by unanimous written consent,
which has the same practical effect as a prohibition on shareholder written actions. This means that shareholders can only
take action at an annual or special shareholders meeting.
|
|
|
|
|
●
|
Removal
of Directors. Our Bylaws provide that our directors may only be removed by the affirmative vote of two-thirds of the shares
entitled to vote at an election of directors, with or without cause.
|
|
●
|
Special
Meetings. Special meetings of stockholders can only be called by the board of directors or at the request of holders of at
least 10% of the shares outstanding and entitled to vote.
|
|
|
|
|
●
|
Undesignated
Preferred Stock. The ability to authorize undesignated preferred stock makes it possible for our board to issue preferred
stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. These and other
provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our Company.
|
These
provisions of Colorado corporation law, our articles of incorporation and our bylaws could have the effect of discouraging others
from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our
common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions
that shareholders may otherwise deem to be in their best interests.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Broadridge, Philadelphia, Pennsylvania.
PLAN
OF DISTRIBUTION
The
selling stockholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares
of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as
a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any
or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions.
The
selling stockholders may use any one or more of the following methods when disposing of shares or interests therein:
|
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block
as principal to facilitate the transaction;
|
|
|
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
●
|
privately
negotiated transactions;
|
|
|
|
|
●
|
short
sales;
|
|
|
|
|
●
|
through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
|
|
|
|
|
●
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
|
|
|
|
|
●
|
a
combination of any such methods of sale; and
|
|
|
|
|
●
|
any
other method permitted pursuant to applicable law.
|
The
selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock
owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer
and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under
Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer
the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will
be the selling beneficial owners for purposes of this prospectus; provided, however, that prior to any such transfer the following
information (or such other information as may be required by the federal securities laws from time to time) with respect to each
such selling beneficial owner must be added to the prospectus by way of a prospectus supplement or post-effective amendment, as
appropriate: (1) the name of the selling beneficial owner; (2) any material relationship the selling beneficial owner has had
within the past three years with us or any of our predecessors or affiliates; (3) the amount of securities of the class owned
by such beneficial owner before the offering; (4) the amount to be offered for the beneficial owner’s account; and (5) the
amount and (if one percent or more) the percentage of the class to be owned by such beneficial owner after the offering is complete.
In
connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course
of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these
securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions
or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution
of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common stock offered by them will be the purchase price of
the common stock less discounts or commissions, if any. Each of the selling stockholders reserves the right to accept and, together
with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly
or through agents. We will not receive any of the proceeds from this offering.
The
selling stockholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under
the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.
The
selling stockholders and any underwriters, broker-dealers or agents, or their affiliates, that participate in the sale of the
common stock or interests therein are “underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions
under the Securities Act. Selling stockholders who are “underwriters” within the meaning of Section 2(11) of the Securities
Act will be subject to the prospectus delivery requirements of the Securities Act.
To
the extent required, the shares of our common stock to be sold, the names of the selling stockholders, the respective purchase
prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
The
maximum amount of compensation to be received by any FINRA member or independent broker-dealer for the sale of any securities
registered under this prospectus will not be greater than 8.0% of the gross proceeds from the sale of such securities.
In
order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only
through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has
been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied
with.
Expenses;
Indemnification
We
will not receive any of the proceeds from the sale of resale shares by the selling shareholders and will bear all expenses related
to the registration of this offering, but will not pay for any commissions, fees or discounts, if any, relating to the sale of
resale shares by the selling shareholders. We have agreed to indemnify the selling shareholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
Supplements
In
the event of a material change in the plan of distribution disclosed in this prospectus, the selling shareholders will not be
able to effect transactions in the resale shares pursuant to this prospectus until such time as a post-effective amendment to
the registration statement is filed with, and declared effective by, the SEC.
Regulation
M
We
have informed each of the selling shareholders that it is required to comply with Regulation M promulgated under the Securities
Exchange Act of 1934, or the Exchange Act, with respect to any purchase or sale of the common stock. In general, Rule 102 under
Regulation M prohibits any person connected with a distribution of common stock from directly or indirectly bidding for, or purchasing
for any account in which it has a beneficial interest, any of the resale shares or any right to purchase the resale shares, for
a period of one trading day before and after completion of its participation in the distribution.
During
any distribution period, Regulation M prohibits each of the selling shareholders and any other persons engaged in the distribution
from engaging in any stabilizing bid or purchasing the common stock except for the purpose of preventing or retarding a decline
in the open market price of the common stock. None of these persons may affect any stabilizing transaction to facilitate any offering
at the market.
We
have also advised each of the selling shareholders that it should be aware that the anti-manipulation provisions of Regulation
M under the Exchange Act will apply to purchases and sales of common stock by such selling shareholder, and that there are restrictions
on market-making activities by persons engaged in the distribution of the resale shares. Under Regulation M, neither the selling
shareholders nor their agents may bid for, purchase, or attempt to induce any person to bid for or purchase, shares of common
stock while they are distributing resale shares. Regulation M may prohibit the selling shareholders from covering short sales
by purchasing resale shares while the distribution is taking place, despite any contractual rights to do so pursuant to conversion
of the Note. We have advised each of the selling shareholders that it should consult with its own legal counsel to ensure compliance
with Regulation M.
LEGAL
MATTERS
The
validity of the shares of common stock being offered is being passed upon for us by Faegre Baker Daniels LLP, Denver, Colorado.
EXPERTS
Eide
Bailly LLP, an independent registered public accounting firm, has audited our consolidated financial statements included in our
Annual Report on Form 10-K for the years ended December 31, 2015 and 2016, as set forth in their report. Our financial statements
are included in reliance on Eide Bailly LLP’s report, given on their authority as experts in accounting and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
are required to file annual and quarterly reports and other information with the SEC. You may read and copy any materials we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549. Please call 1-800-SEC-0330
for further information on the operation of the Public Reference Room. Our filings will also be available to the public from commercial
document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. Our reports and other information
that we have filed, or may in the future file, with the SEC are not incorporated by reference into and do not constitute part
of this prospectus.
We
have filed with the SEC a registration statement on Form S-1 (including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of common stock being offered in this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information
with respect to the shares of common stock offered hereby, we refer you to the registration statement and the exhibits and schedules
filed therewith. Statements contained in this prospectus as to the contents of any contract, agreement or any other document are
summaries of the material terms of such contract, agreement or other document and are not necessarily complete. With respect to
each of these contracts, agreements or other documents filed as an exhibit to the registration statement, reference is made to
the exhibits for a more complete description of the matter involved.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
DECEMBER
31, 2016
FINANCIAL
STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
of
Two Rivers Water & Farming Company
Denver,
Colorado
We
have audited the accompanying consolidated balance sheets of Two Rivers Water & Farming Company (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the years then ended. Two Rivers Water & Farming Company’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Two Rivers Water & Farming Company as of December 31, 2016 and 2015, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 2016 in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Note 3 to the consolidated financial statements, the Company has made plans to discontinue its farming operations
as of December 31, 2016. Our opinion is not modified with respect to this matter.
/s/
Eide Bailly LLP
Denver,
Colorado
March
29, 2017
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
DERIVED
FROM THE COMPANY’S 10K FILING
Consolidated
Balance Sheets
(In
thousands, except for number of shares)
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
150
|
|
|
$
|
490
|
|
Accounts
receivable related party, net
|
|
|
240
|
|
|
|
910
|
|
Farm
product
|
|
|
-
|
|
|
|
-
|
|
Deposits
and other current assets
|
|
|
5
|
|
|
|
-
|
|
Assets
of discontinued operations held for sale
|
|
|
2,785
|
|
|
|
5,158
|
|
Total
Current Assets
|
|
|
3,180
|
|
|
|
6,558
|
|
Long
Term Assets:
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net
|
|
|
599
|
|
|
|
283
|
|
Land
|
|
|
2,851
|
|
|
|
2,852
|
|
Water
assets
|
|
|
32,135
|
|
|
|
31,550
|
|
Greenhouse
and infrastructure
|
|
|
5,402
|
|
|
|
1,827
|
|
Construction
in progress
|
|
|
3,520
|
|
|
|
4,684
|
|
Intangible
assets, net
|
|
|
-
|
|
|
|
-
|
|
Other
long term assets
|
|
|
80
|
|
|
|
135
|
|
Total
Long Term Assets
|
|
|
44,587
|
|
|
|
41,331
|
|
TOTAL
ASSETS
|
|
$
|
47,767
|
|
|
$
|
47,889
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,495
|
|
|
$
|
327
|
|
Accrued
liabilities
|
|
|
695
|
|
|
|
357
|
|
Current
portion of notes payable
|
|
|
10,780
|
|
|
|
10,785
|
|
Preferred
dividend payable
|
|
|
3,105
|
|
|
|
1,341
|
|
Liabilities
of discontinued operations held for sale
|
|
|
3,639
|
|
|
|
2,947
|
|
Total
Current Liabilities
|
|
|
19,714
|
|
|
|
15,757
|
|
Notes
Payable, net of current portion and unamortized debt issuance costs
|
|
|
4,758
|
|
|
|
1,008
|
|
Total
Liabilities
|
|
|
24,472
|
|
|
|
16,765
|
|
Commitments
& Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 30,452,075 and 26,980,811 shares issued and outstanding at Dec
31, 2016 and 2015, respectively
|
|
|
31
|
|
|
|
27
|
|
Additional
paid-in capital
|
|
|
75,142
|
|
|
|
73,702
|
|
Accumulated
(deficit)
|
|
|
(84,244
|
)
|
|
|
(73,517
|
)
|
Total
Two Rivers Water Company Shareholders’ Equity
|
|
|
(9,071
|
)
|
|
|
212
|
|
Noncontrolling
interest in subsidiary
|
|
|
32,366
|
|
|
|
30,912
|
|
Total
Stockholders’ Equity
|
|
|
23,295
|
|
|
|
31,124
|
|
TOTAL
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
47,767
|
|
|
$
|
47,889
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated
Statements of Operations
(In
thousands, except for Loss per Share)
|
|
For
the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Leasing
– Greenhouse (related party)
|
|
|
204
|
|
|
|
947
|
|
Other
|
|
|
68
|
|
|
|
78
|
|
Total
Revenue
|
|
|
272
|
|
|
|
1,025
|
|
Direct
cost of revenue
|
|
|
|
|
|
|
|
|
Cost
of lease revenue
|
|
|
-
|
|
|
|
203
|
|
Total
direct cost of revenue
|
|
|
-
|
|
|
|
203
|
|
Gross
profit (loss)
|
|
|
272
|
|
|
|
822
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,711
|
|
|
|
2,051
|
|
Depreciation
& amortization
|
|
|
166
|
|
|
|
173
|
|
Total
operating expenses
|
|
|
3,877
|
|
|
|
2,224
|
|
(Loss)
from operations
|
|
|
(3,605
|
)
|
|
|
(1,402
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,780
|
)
|
|
|
(1,325
|
)
|
Warrant
and options expense
|
|
|
(327
|
)
|
|
|
(86
|
)
|
Other
income (expense)
|
|
|
17
|
|
|
|
98
|
|
Total
other income (expense)
|
|
|
(2,090
|
)
|
|
|
(1,313
|
)
|
Net
(Loss) from continuing operations before taxes
|
|
|
(5,695
|
)
|
|
|
(2,715
|
)
|
Income
tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from discontinued operations
|
|
|
(2,624
|
)
|
|
|
(1,025
|
)
|
Net
(Loss)
|
|
|
(8,319
|
)
|
|
|
(3,740
|
)
|
Net
loss (income) attributable to the noncontrolling interest
|
|
|
200
|
|
|
|
(6
|
)
|
Net
(Loss)
|
|
|
(8,119
|
)
|
|
|
(3,746
|
)
|
Preferred
shareholder distributions
|
|
|
(2,608
|
)
|
|
|
(2,411
|
)
|
Net
(Loss) attributable to Two Rivers Water & Farming Company Common Shareholders
|
|
$
|
(10,727
|
)
|
|
$
|
(6,157
|
)
|
|
|
|
|
|
|
|
|
|
(Loss)
Per Share - Basic and Dilutive:
|
|
$
|
(0.38
|
)
|
|
$
|
(0.22
|
)
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
and Dilutive
|
|
|
28,147
|
|
|
|
26,782
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
For
the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(10,927
|
)
|
|
$
|
(6,151
|
)
|
Adjustments
to reconcile net income or (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
839
|
|
|
|
559
|
|
Accretion
of debt discount
|
|
|
199
|
|
|
|
245
|
|
Loss
from debt extinguishment
|
|
|
62
|
|
|
|
-
|
|
Write
off of Suncanna receivable and advance
|
|
|
910
|
|
|
|
-
|
|
Stock
Option and Warrant expense
|
|
|
477
|
|
|
|
204
|
|
In-kind
distributions
|
|
|
495
|
|
|
|
1,458
|
|
Loss
(gain) on write down of intangible assets related to farming ops.
|
|
|
887
|
|
|
|
-
|
|
Loss
(gain) on write down of intangible assets related to property and equipment
|
|
|
343
|
|
|
|
-
|
|
(Gain)
loss on sale of investments and assets held
|
|
|
-
|
|
|
|
(101
|
)
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
73
|
|
|
|
(207
|
)
|
(Increase)
in accounts receivable, related party
|
|
|
(240
|
)
|
|
|
(700
|
)
|
(Increase)
decrease in farm product
|
|
|
81
|
|
|
|
(59
|
)
|
(Increase)
decrease in deposits, prepaid expenses and other assets
|
|
|
29
|
|
|
|
(50
|
)
|
Increase
in accounts payable
|
|
|
1,905
|
|
|
|
202
|
|
Increase
in distribution payable to preferred shareholders
|
|
|
1,764
|
|
|
|
-
|
|
Increase
in accrued liabilities and other
|
|
|
374
|
|
|
|
1,439
|
|
Net
Cash (Used in) Operating Activities
|
|
|
(2,729
|
)
|
|
|
(3,161
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(192
|
)
|
|
|
(96
|
)
|
Purchase
of land, water shares, infrastructure
|
|
|
(691
|
)
|
|
|
(352
|
)
|
Construction
in progress
|
|
|
(2,597
|
)
|
|
|
(5,430
|
)
|
Net
Cash (Used in) Investing Activities
|
|
|
(3,480
|
)
|
|
|
(5,878
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance
of GCP Super Units
|
|
|
1,095
|
|
|
|
-
|
|
Proceeds
from sale of convertible preferred shares
|
|
|
-
|
|
|
|
4,580
|
|
Proceeds
from warrant exercises
|
|
|
456
|
|
|
|
-
|
|
Proceeds
from long-term debt
|
|
|
5,237
|
|
|
|
3,869
|
|
Payment
on notes payable
|
|
|
(950
|
)
|
|
|
(823
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
5,838
|
|
|
|
7,626
|
|
Net
(Decrease) in Cash & Cash Equivalents
|
|
|
(371
|
)
|
|
|
(1,413
|
)
|
Beginning
Cash & Cash Equivalents
|
|
|
521
|
|
|
|
1,934
|
|
Ending
Cash & Cash Equivalents
|
|
$
|
150
|
|
|
$
|
521
|
|
Continued
on next page
Continued
from previous page
|
|
For
the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $288 and $438 respectively capitalized into CIP
|
|
$
|
1,460
|
|
|
$
|
1,177
|
|
Equipment
purchases financed
|
|
$
|
67
|
|
|
$
|
64
|
|
Conversion
of debt, preferred shares into Two Rivers common stock
|
|
$
|
261
|
|
|
$
|
281
|
|
Conversion
of bridge loans to GrowCo Partners 1, LLC
|
|
$
|
-
|
|
|
$
|
1,840
|
|
Conversion
of preferred distribution into GrowCo Partners 1, LLC
|
|
$
|
-
|
|
|
$
|
498
|
|
Land
exchanged for debt
|
|
$
|
381
|
|
|
$
|
-
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2016 and 2015
(In
thousands)
|
|
Voting
Shares
|
|
|
Common
Stock Amount
|
|
|
Additional
Paid-in Capital
|
|
|
Accumulated
(Deficit)
|
|
|
Non-Controlling
Interest
|
|
|
Stockholders’
Equity
|
|
Balances,
December 31, 2014
|
|
|
26,524
|
|
|
$
|
27
|
|
|
$
|
73,217
|
|
|
$
|
(67,360
|
)
|
|
$
|
22,811
|
|
|
$
|
28,695
|
|
Net
Income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,157
|
)
|
|
|
-
|
|
|
|
(6,157
|
)
|
Minority
share of income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Warrant
and option expense
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
Shares
issued for services
|
|
|
133
|
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
Shares
issued for TR Capital conversions
|
|
|
179
|
|
|
|
-
|
|
|
|
152
|
|
|
|
-
|
|
|
|
(152
|
)
|
|
|
-
|
|
Shares
issued for F-2 conversions
|
|
|
59
|
|
|
|
-
|
|
|
|
129
|
|
|
|
-
|
|
|
|
(129
|
)
|
|
|
-
|
|
RSU
share issuance
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Offering
costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(501
|
)
|
|
|
(501
|
)
|
GrowCo
Partners 1, LLC preferred membership offering
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,067
|
|
|
|
3,067
|
|
Distribution
of GrowCo Partners 1, LLC units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
998
|
|
|
|
998
|
|
GCP
Super Units, LLC preferred membership offering
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,854
|
|
|
|
3,854
|
|
TRCap
Distribution in-kind to TR Capital holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
958
|
|
|
|
958
|
|
Balances,
December 31, 2015
|
|
|
26,981
|
|
|
$
|
27
|
|
|
$
|
73,702
|
|
|
$
|
(73,517
|
)
|
|
$
|
30,912
|
|
|
$
|
31,124
|
|
Continued
on the next page
Continued
from previous page
|
|
Voting
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Non-
Controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Interest
|
|
|
Equity
|
|
Balances,
December 31, 2015
|
|
|
26,981
|
|
|
$
|
27
|
|
|
$
|
73,702
|
|
|
$
|
(73,517
|
)
|
|
$
|
30,912
|
|
|
$
|
31,124
|
|
Net
Income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,727
|
)
|
|
|
-
|
|
|
|
(10,727
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
(200
|
)
|
TR
Cap 20151231 Distribution – in-kind to TR Capital holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
495
|
|
|
|
495
|
|
Shares
issued for TR Capital conversions
|
|
|
36
|
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
-
|
|
Warrant
repricing
|
|
|
|
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
327
|
|
GrowCo
unvesting release
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
100
|
|
Warrants
exercised
|
|
|
649
|
|
|
|
1
|
|
|
|
455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
456
|
|
Debt
exchanged for shares of common stock
|
|
|
728
|
|
|
|
1
|
|
|
|
286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
287
|
|
TURV
warrants issued with GrowCo debt
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288
|
|
GCP
Super Units, LLC preferred membership offering
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,095
|
|
|
|
1,095
|
|
Stock
based compensation
|
|
|
2,058
|
|
|
|
2
|
|
|
|
48
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
Balances,
December 31, 2016
|
|
|
30,452
|
|
|
$
|
31
|
|
|
$
|
75,142
|
|
|
$
|
(84,244
|
)
|
|
$
|
32,366
|
|
|
$
|
23,295
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2016 and 2015
NOTE
1 – ORGANIZATION AND BUSINESS
The
following is a summary of some of the information contained in this document. Unless the context requires otherwise, references
in this document to “Two Rivers,” or the “Company” is to Two Rivers Water & Farming Company and its
subsidiaries.
Corporate
Evolution
Prior
to 2009, the Company was named Navidec Financial Services, Inc. (“Navidec”) and had been engaged in mortgage lending
and other enterprises unrelated to its current lines of business. Navidec was incorporated in the state of Colorado on December
20, 2002. On July 28, 2009, Navidec formed a wholly-owned Colorado corporation for the purpose of acquiring farm and water assets
in the Colorado Huerfano/Cucharas watershed. On November 19, 2009, with shareholder approval, Navidec changed its name to Two
Rivers Water Company. On December 11, 2012, with shareholder approval, the Company changed its name to Two Rivers Water &
Farming Company. On January 29, 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated
manner based on functional operations. We formed a new company, TR Capital Partners, LLC or TR Capital, which issued all of its
common units to Two Rivers Water & Farming Capital. TR Capital then initiated the transactions described below under “Placement
of Preferred Units”. Following the completion of those transactions in September 2014, TR Capital and our other direct and
indirect subsidiaries (excluding HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company) entered into a series of related
transactions as the result of which assets and operations of such other subsidiaries transferred to TR Capital. As a result of
those transactions, TR Capital operates all of the operations formerly conducted by those subsidiaries. The following chart shows
a high-level view of our corporate organization as of March 21, 2017. For a more detailed accounting of ownership structure please
refer to exhibit 21.1 filed herewith.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of December 31,
2016, we own 7,376 gross acres. Gross acres owned decreased from 8,546 gross acres at December 31, 2015 due to the sale of 1,170
acres. We will seek to expand our holdings by strategically acquiring or leasing irrigable farmland in the Arkansas River Basin.
We intend to develop and bring into production more of our currently held gross acres as we acquire additional water rights.
We
are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets
and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. Our water asset area spans
over 1,900 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of
Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along
the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water
contained therein and serve the community while providing returns to our investors.
Since
October 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest.
We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest
strategically in the assets that will. Specifically, we are selling our irrigated farmland currently used for the production of
produce, the associated Dionisio produce business along with land that no longer serves our strategic vision of water management.
We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In
May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common
stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’
common shareholders based on four record dates (January 1, 2015; April 1, 2015; July 1, 2015, and October 1, 2015) after an effective
registration statement is filed, which has not yet occurred. Each record date will distribute 2,500,000 GrowCo common shares on
a prorata basis of shares owned of Two Rivers’ common shares.
On
January 20, 2015, GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which
consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land.
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
March 2016, GrowCo completed a $5.5 million private placement of equity interests of GCP Super Units, LLC, which will invest directly
in various assets of GCP1 and GCP2, with proceeds to be used to complete the construction of the first greenhouse, partially fund
the second greenhouse and provide working capital. The outside investment in GCP Super Units, LLC is reflected on our balance
sheet as a non-controlling equity interest.
GCP1’s
greenhouse was partially occupied in September with lease revenue beginning September 1, 2015. On April 14, 2016, we received
notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that the then current tenant, Suncanna, LLC
(“Suncanna”), had received a suspension order. This suspension, in addition to non-payment of back due lease payments
owed, caused Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 began the eviction process against Suncanna.
Due to the eviction process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related
Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. During the
nine months ended September 30, 2016, we recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna
in early April 2016. The total write off of $1.330 million was partially offset by a $350,000 reduction in the amount owed to
the GCP1 preferred unit holders. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate GCP1’s greenhouse by September 6, 2016. On August 31, 2016, a lawsuit was filed by Aaron
Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against GrowCo, GrowCo Business Development, LLC.,
GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees, and associates. The Company believes
that the suit has no merit and will have no material impact on the Company’s financial condition.
Our
second greenhouse project will also consist of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse
facility on an additional 40 acres of land. Upon completion, this project will be operated, as a landlord, by GrowCo Partners
2, LLC, or GCP 2. GCP 2’s greenhouse will share some facilities (e.g., boiler, water, generator) whereby costs might be
shared with GCP 1. GCP 2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an expected completion in mid 2017. Our third facility will be an oil Extraction Facility which is expected to be approximately
26,000 square feet.
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.
As of March 7, 2017, GrowCo had raised $5.0 million, including the $200,000 of notes issued in exchange for the earlier offered
notes, at which time the offering was closed. A new $2M offering was subsequently initiated in March 2017 with substantially the
same terms for the purposes of finishing the second greenhouse.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company and TR
Capital and its subsidiaries, Two Rivers Farms, Two Rivers Water and GrowCo. All significant inter-company balances and transactions
have been eliminated in consolidation.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the balance sheet.
Entity
|
|
Year
ended December 31,
|
|
|
2016
|
|
|
2015
|
|
TR
Capital
|
|
$
|
20,552,000
|
|
|
$
|
20,588,000
|
|
HCIC
|
|
|
1,381,000
|
|
|
|
1,375,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(106,000
|
)
|
|
|
-
|
|
GrowCo
Partners 1, LLC
|
|
|
3,521,000
|
|
|
|
3,521,000
|
|
GCP
Super Units, LLC
|
|
|
4,923,000
|
|
|
|
3,828,000
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
497,000
|
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
460,000
|
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
495,000
|
|
|
|
-
|
|
Totals
|
|
$
|
32,366,000
|
|
|
$
|
30,912,000
|
|
During
the year ended December 31, 2014, investors in Two Rivers Farms F-1 (convertible notes and preferred shares), Two Rivers Farms
F-2 (convertible notes and preferred shares), the Company’s preferred shares, ASF convertible notes, DFP preferred shares,
Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners,
LLC and were issued 30,159,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.
The
30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common
stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20,
Debt (and other convertible instruments with beneficial convertible features (“BCF”),
the Company determined
that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000
were recorded for the year ended December 31, 2014. On the accompanying balance sheet as of December 31, 2015, these amounts were
recorded as retained earnings and as additional paid in capital, respectively, and are representative of preferred share dividends
available to non-controlling interest holders in the entity.
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,
|
|
|
|
2016
|
|
|
2015
|
|
HCIC
(1)
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
F-1
(2)
|
|
|
-
|
|
|
|
-
|
|
F-2
(2)
|
|
|
-
|
|
|
|
-
|
|
DFP
(2)
|
|
|
-
|
|
|
|
-
|
|
GrowCo
|
|
|
(206,000
|
)
|
|
|
-
|
|
GrowCo
Partners 1, LLC
|
|
|
-
|
|
|
|
-
|
|
GCP
Super Units, LLC
|
|
|
-
|
|
|
|
-
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
-
|
|
|
|
-
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
(200,000
|
)
|
|
$
|
6,000
|
|
Notes:
|
(1)
|
The
Company owns 95% of HCIC.
|
|
|
|
|
(2)
|
The
terms of the preferred shares in each subsidiary allows for a participatory additional preferred share dividend of 25% of
the profits derived from the assets held by the subsidiary. This participatory dividend, if any, will be recorded as a non-controlling
share of the income.
|
Reclassification
Certain
amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications
have been changed.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, Two Rivers Water & Farming Company considers cash and cash equivalents to include highly
liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant
risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term
nature of these financial instruments.
Concentration
of Credit Risk
Financial
instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, marketable
investments, advances and accounts receivable. The Company maintains its cash balances in the form of bank demand deposits, money
market accounts that management believes to be of high credit quality. Accounts receivable are typically uncollateralized and
are derived from transactions with and from customers primarily located in the United States.
Fair
Value of Measurements and Disclosures
Fair
Value of Assets and Liabilities Acquired
Fair
value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) in the
principal or most advantageous market in an orderly transaction between market participants. In determining fair value, the accounting
standards established a three-level hierarchy that distinguishes between (i) market data obtained or developed from independent
sources (i.e., observable data inputs) and (ii) a reporting entity’s own data and assumptions that market participants would
use in pricing an asset or liability (i.e., unobservable data inputs). Financial assets and financial liabilities measured and
reported at fair value are classified in one of the following categories, in order of priority of observability and objectivity
of pricing inputs:
|
●
|
Level
1 –
Fair value based on quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2
– Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly
observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets
for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or
(iii) information derived from or corroborated by observable market data.
|
|
|
|
|
●
|
Level
3
– Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs
would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in
pricing the asset or liability.
|
The
fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair
value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
Recurring
Fair Value Measurements
The
carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value.
The carrying value of cash held as demand deposits, money market and certificates of deposit, marketable investments, accounts
receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. Marketable investments
are valued at Level 1 due to readily available market quotes. The fair value of the Company’s long-term debt, including
the current portion approximated its carrying value. Fair value for long-term debt was estimated based on quoted market prices
of the identical debt instruments or values of comparable borrowings.
Accounts
Receivable, Related Party
The
Company carries its accounts receivable, net at management’s expectation of collection and past experience. As of December
31, 2016, and 2015, the Company did not have an allowance for doubtful accounts receivable based on past payment performance.
See Note 11 for transactions with this related party.
Capitalization
of Interest
As
of December 31, 2016, $725,000 in notes payable interest has been capitalized in the construction of greenhouse 1 and 2. As of
December 31, 2015, $438,000 in preferred return has been capitalized in the construction of greenhouse 1 and 2. This mostly represents
the 12% preferred return to holder of GrowCo Partners 1, LLC during the construction phase of greenhouse 1.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset which ranges from three to twenty-seven and a half years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the
related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged
to income.
Below
is a summary of premises and equipment:
|
|
|
|
|
December
31,
|
|
Asset
Type
|
|
Life
in Years
|
|
|
2016
|
|
|
2015
|
|
Office
equipment, furniture, computers
|
|
|
5
– 7
|
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
Computers
|
|
|
3
|
|
|
|
47,000
|
|
|
|
45,000
|
|
Vehicles
|
|
|
5
|
|
|
|
116,000
|
|
|
|
45,000
|
|
Farm
equipment
|
|
|
7
- 10
|
|
|
|
1,632,000
|
|
|
|
1,807,000
|
|
Irrigation
system
|
|
|
10
|
|
|
|
995,000
|
|
|
|
995,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
393,000
|
|
|
|
393,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
3,201,000
|
|
|
|
3,303,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(1,842,000
|
)
|
|
|
(1,354,000
|
)
|
Net
book value
|
|
|
|
|
|
$
|
1,359,000
|
|
|
$
|
1,949,000
|
|
Land
Land
acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore,
additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added
to the cost of the land. Irrigation is not capitalized in the cost of Land (
Property and Equipment
above). Land is not
depreciated. However, once per year, Management will assess the value of land held, and in their opinion, if the land has become
impaired, Management will establish an allowance against the land.
Water
rights and infrastructure
Subsequent
to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and
if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there
is a $30,000 impairment on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.
Intangibles
Two
Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in HCIC and Orlando.
These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and
considerations, including, the historical upward valuation of water rights within Colorado.
Impairments
Property
and Equipment
Once
per year we review all property, equipment and software owned by the Company and compared the net book value of such assets with
the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net
book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value
of the affected asset will be recorded, and the impairment will not be reversed in future periods.
Land
Once
per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying
cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent
appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment
is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.
Water
rights and infrastructure
Once
per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable
water rights. In the event that such assessment indicates that the carrying value is greater than the fair market value of the
water rights, 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. Currently, there is a $30,000 impairment on the Company’s land
and water shares.
Impairment
of DFP Intangible
In
2016, due to the discontinuance of DFP operations, we wrote off the full value of DFP intangibles (see Note 4).
Revenue
Recognition
Lease
Revenues – Related Party
The
lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840.
Lease
revenue is recognized monthly at the end of each month. Total lease payments under the 120-month lease agreement for 50% of GCP1,
which are $21,433,000, is divided by the lease term. Therefore, the average lease rate per month is $179,000. This spreads the
total amount of the lease payment stream over the life of the lease.
Member
Assessments
Once
per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment
per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half
of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to
HCIC are eliminated in consolidation of the financial statements.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
Stock
Based Compensation
Beginning
January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC
718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period,
which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not
revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding
as of the effective date and are subsequently modified.
All
options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of
adoption.
Debt
and Equity
The
Company accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt,
and allocates proceeds received to the warrants based on relative fair values.
The
Company also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”),
which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or
in the money at inception because the conversion option has an effective strike price that is less than the market price of the
underlying stock at the commitment date. The Company would recognize the BCF by allocating the intrinsic value of the conversion
option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion
price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in
a discount on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
Income
Taxes
Provision
for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities
are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards. The change in deferred
tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in
enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period
of enactment.
The
Company uses a two-step process to evaluate a tax position. The first step is to determine whether it is more-likely-than-not
that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on
the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold
to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount
of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent
period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria
should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company
reports tax-related interest and penalties as a component of income tax expense.
Based
on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits
as of December 31, 2016, is not material to its results of operations, financial condition, or cash flows. The Company also believes
that the total amount of unrecognized tax benefits as of December 31, 2016, if recognized, would not have a material effect on
its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based
on current tax law and policy that the unrecognized tax benefits will significantly increase or decrease over the next 12 months
producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition
or cash flows.
The
amount of income taxes the Company pays is subject to ongoing examinations by federal and state tax authorities. To date, there
have been no reviews performed by federal or state tax authorities on any of the Company’s previously filed returns. The
Company’s 2013 and later tax returns are still subject to examination.
Net
Income (Loss) per Share
Basic
net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the
period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed
by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during
the period.
The
dilutive effect of the outstanding 244,00 RSUs, 6,163,315 options, and 16,461,663 warrants at December 31, 2016, has not been
included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.
Recently
Issued Accounting Pronouncements
In
April 2015, FASB issued ASU 2015-03, “
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs”.
The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016. Early adoption is allowed for financial statements that have not been previously issued.
Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the
debt liability, similar to the presentation of debt discounts. The Company has elected to adopt this ASU early and is presented
in these financial statements.
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases”. The new standard
establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet
for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning
after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected
to result in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management
believes that this ASU will have an impact on its financials and is in the process of analyzing its impact.
In
November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
”, which requires
that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify
the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption
of this update to have a material impact on its financial statements.
In
August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09,
“
Revenue from Contracts with Customers
”, which amended revenue recognition guidance to clarify the principles
for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record the transfer
of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange
for those goods or services. Expanded additional disclosures are required relating to the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required
about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill
a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one
of two prescribed retrospective methods. Early adoption is not permitted. At this point, due to the Company having no revenue
contracts with customers, except for leasing agreements, Management believes that there will be no material impact on its financial
statements.
In
July 2015, the FASB issued ASU 2015-11, “
Simplifying the Measurement of Inventory
”. Under this ASU, inventory
will be measured at the “lower of cost and net realizable value” and options that currently exist for “market
value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made
to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December
15, 2016. Early application is permitted and should be applied prospectively. Management has early adopted ASU 2015-11 and notes
no material impact on the Company’s financial position or results of operations.
In
August 2014, the FASB issued ASU No. 2014-15, “
Disclosure of Uncertainties About an Entity’s Ability to Continue
as a Going Concern
, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40
Presentation of Financial Statements – Going
Concern”
, by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties
in their financial statements, including requiring management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date of issuance of the entity’s financial statements and providing
certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15
will be effective after December 15, 2016, and early adoption is permitted.
On
February 25, 2016, FASB issued a new lease accounting standard, ASU 2016-02,
Leases
(Topic 842). The new leasing standard
presents changes to the balance sheets of lessees. The guidance in the ASU is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. Lessor accounting is updated to align with certain changes in the
lessee model and the new revenue recognition standard. We are evaluating the impact of this ASU on our financial statement disclosures.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
NOTE
3 – DISCONTINUED OPERATIONS
During
the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided
to sell all assets associated with this business due to the sustained losses incurred.
The
assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued
operations held for sale” and Liabilities of discontinued operations held for sale,” respectively, in the accompanying
Consolidated Balance Sheets at December 31, 2016 and December 31, 2015 consist of the following:
Assets
of discontinued operations held for sale:
|
|
|
2016
|
|
|
|
2015
|
|
Cash
|
|
$
|
6,000
|
|
|
$
|
31,000
|
|
Accounts
receivable
|
|
|
37,000
|
|
|
|
110,000
|
|
Farm
Product
|
|
|
-
|
|
|
|
81,000
|
|
Deposits
and other current assets
|
|
|
57,000
|
|
|
|
51,000
|
|
Intangible
Assets
|
|
|
-
|
|
|
|
917,000
|
|
Land
and equipment
|
|
|
2,685,000
|
|
|
|
3,968,000
|
|
Total
assets
|
|
$
|
2,785,000
|
|
|
$
|
5,158,000
|
|
Liabilities
of discontinued operations held for sale:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
777,000
|
|
|
$
|
40,000
|
|
Accrued
liabilities
|
|
|
42,000
|
|
|
|
2,000
|
|
Notes
payable
|
|
|
2,820,000
|
|
|
|
2,905,000
|
|
Total
liabilities
|
|
$
|
3,639,000
|
|
|
$
|
2,947,000
|
|
The
income from discontinued operations presented in the statements of operations consist of the following for the year ended December
31, 2016 and December 31, 2015:
Revenues
|
|
$
|
3,774,000
|
|
|
$
|
2,413,000
|
|
Cost
of goods sold
|
|
|
4,308,000
|
|
|
|
2,857,000
|
|
General
and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
560,000
|
|
|
|
386,000
|
|
Interest
|
|
|
284,000
|
|
|
|
195,000
|
|
Other
(loss on disposal of assets and intangibles)
|
|
|
1,246,000
|
|
|
|
-
|
|
Total
|
|
$
|
(2,624,000
|
)
|
|
$
|
1,025,000
|
|
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 will be used to pay off secured debt first
with any residual proceeds used to pay unsecured debt. The loss on sale of land was not material.
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 are no impairments on the Company’s land
and water shares. No amortization or depreciation is taken on the water rights.
Construction
in progress
During
the year ended December 31, 2016, the Company transferred, as a partial completion, $3,315,000 into the first greenhouse. The
Company has expended $8,922,000 on greenhouses 1 and 2. Management’s current plan is to complete greenhouse 2 to be 90,000
square feet with an associated 15,000 square foot warehouse.
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning
balance
|
|
$
|
4,684,000
|
|
|
$
|
1,081,000
|
|
Additions
|
|
|
2,495,000
|
|
|
|
5,430,000
|
|
Finished
- Transferred
|
|
|
(3,659,000
|
)
|
|
|
(1,827,000
|
)
|
Ending
Balance
|
|
$
|
3,520,000
|
|
|
$
|
4,684,000
|
|
Intangible
Asset
s
On
November 2, 2012, the Company acquired the Dionisio produce business and related equipment for $1,873,000 plus accrued interest
of $30,000.
The
purchase price was allocated as follows:
Produce
business
|
|
$
|
1,037,000
|
|
Equipment
|
|
|
836,000
|
|
Prepaid
interest
|
|
|
30,000
|
|
Ending
Balance
|
|
$
|
1,903,000
|
|
Due
to the discontinuance of the DFP farming operations, all of these assets have been written off as of December 31, 2016.
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Customer
list
|
|
$
|
-
|
|
|
$
|
580,000
|
|
Trade
name
|
|
|
-
|
|
|
|
220,000
|
|
Residual
goodwill
|
|
|
-
|
|
|
|
237,000
|
|
|
|
|
-
|
|
|
|
1,037,000
|
|
Less
accumulated amortization
|
|
|
-
|
|
|
|
(120,000
|
)
|
Ending
Balance
|
|
$
|
-
|
|
|
$
|
917,000
|
|
NOTE
5 – NOTES PAYABLE
HCIC
Seller Carry Back Notes
Beginning
on September 17, 2009, Two Rivers began acquiring shares in HCIC and related land from a HCIC shareholder. As part of these acquisitions,
many of the sellers financed notes payable with Two Rivers and HCIC. As of December 31, 2012, these loans totaled $7,364,000.
The notes carry interest at 6% per annum, interest payable monthly, the principal amounts were due at various dates from March
31, 2013 through September 30, 2016, and are collateralized by HCIC shares and land.
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.
For
the year ending December 31, 2016 the Company is in technical default on $6,660,000 of the HCIC carry back notes due to non-payment
of principle. Consequently, the entire amount of the notes has been classified as current. Management has been in contact with
the various holders about an extension to July 1, 2019. As of December 31, 2016, management has received written commitments to
extend $5,653,000 of these notes to July 1, 2019.
Holders
representing $3,181,000 of the notes held conversion rights into the Company’s common shares at $1.00 to $1.25. These conversions
were cancelled and replaced by 5-year warrants at $3.00 per share. A total of 1,367,000 warrants were issued. The warrants issued
had a fair value of $277,000 using the Black Scholes method of fair value determination.
Colorado
Water Conservation Loan (“CWCB”)
On
March 5, 2012, the Company closed long-term financing with the Colorado Department of Natural Resources, Colorado Water Conservation
Board in the amount of $1,185,000 (the “CWCB Loan”). This loan partially finances the rehabilitation of the Cucharas
Reservoir to bring it into safety compliance with the Colorado State Engineers office. Further, the CWCB Loan assisted with the
rehabilitation of the Orlando facilities. 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, 2016, and 2015, the amounts outstanding under the CWCB Loan totaled
$798,000 and $845,000, respectively.
FirstOak
Bank – Dionisio Purchase
The
cost of the Dionisio land/water acquisition was $1,500,000, of which $900,000 was financed by FirstOak Bank and $600,000 was paid
in cash.
The
terms of the FirstOak loan is at 1% above the base rate on corporate loans posted by at least 75% of the nation’s 30 largest
banks known as the Wall Street Journal Prime Rate (3.50% as of December 31, 2016 and 3.25% as of December 31, 2015), subject to
a minimum of 6% per annum. The FirstOak loan is secured by the Dionisio assets, which include 146 shares of the Bessemer Irrigation
Ditch Company (“BIDC”). There are five annual payments of $76,000 due each December 15 commencing December 15, 2012.
A balloon payment of all accrued interest and outstanding principal is due June 15, 2017. As of December 31, 2016 and 2015, the
amounts outstanding under the FirstOak loan totaled $771,000 for both years.
In
May 2014, the Company also borrowed $176,000 to purchase additional farmland. The loan is at 1.5% above the base rate on corporate
loans posted by at least 75% of the nation’s 30 largest banks known as the Wall Street Journal Prime Rate, subject to a
minimum of 6% per annum. The FirstOak loan is secured by 9 BIDC shares, well permits and water leases. There are five annual payments
of $15,000 due each December 15 commencing December 15, 2014. A balloon payment of all accrued interest and outstanding principal
is due December 5, 2018 of $160,000. As of December 31, 2016 and 2015, the amounts outstanding under the FirstOak loan totaled
$118,000 and $162,000, respectively. We plan to settle this debt with the dissolution of farming operations.
Seller
Carry Back – Dionisio
On
November 2, 2012, the Company acquired the Dionisio produce business and related equipment for $1,500,000. The seller carried
back $600,000 (which was subsequently reduced to $590,000 due to the Company assuming additional debt owed by seller) of this
purchase price. The note is paid quarterly, interest only at 6% per annum. The note is due November 2, 2017. Certain assets of
Dionisio secure the note. The Company is in default on this debt due to non-payment of interest. We plan to settle this debt with
the dissolution of farming operations.
FirstOak
Bank – Mater Purchase
The
cost of the Mater land/water acquisition was $325,000, of which $169,000 was financed by FirstOak, $25,000 seller carry back and
$131,000 was paid in cash. The purchase price has been allocated to land for $106,000 and $219,000 to water rights representing
the purchase of BIDC shares.
The
terms of the First Oak loan is at 1% above the base rate on corporate loans posted by at least 75% of the nation’s 30 largest
banks known as the Wall Street Journal Prime Rate, subject to a minimum of 6% per annum. The FirstOak loan is secured by the Mater
assets. There are four annual payments of $15,000 due each December 5 commencing December 15, 2013. A balloon payment of all accrued
interest and outstanding principal is due December 5, 2017 for $159,000.
As
of December 31, 2016 and 2015, the amounts outstanding under the FirstOak loan totaled $156,000 and $152,000, respectively. We
plan to settle this debt with the dissolution of farming operations.
McFinney
Agri-Finance LLC (McFinney) and Ellicot second mortgage (Ellicot)
On
March 15, 2013, the Company purchased unimproved land in El Paso county, Colorado for a purchase price of $1,250,000. The company
paid $620,000 (including closing costs and allocations) and financed $650,000 McFinney and $400,000 Ellicot, through private investors.
The
terms of the McFinney financing is for monthly payments of principal and interest of $4,238 per month, a fixed interest rate of
6.8% per annum, with the remaining principal due on April 1, 2018. The note is secured by a deed of trust on the 2,579 acres of
land purchased and a guaranty of payment by the Company. As of December 31, 2016 and 2015, the amounts outstanding under the McFinney
loan totaled $625,000 and $631,000, respectively.
GrowCo
$4M Notes
During
the ended December 31, 2015, the Company, through its subsidiary GrowCo, issued $4,000,000 in promissory notes to 17 individual
investors. The notes have a security interest in the land, water and improvements to the 157 acres where GrowCo Partners 1 and
GrowCo Partners 2 are developing the greenhouses. The notes pay 22.5% in annual interest, with interested paid monthly, and are
due April 1, 2020. The Company cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary,
or thereafter, of each note with a 60-day notice to the Company. Due to this call provision, the net amount of the GrowCo note
balance of $4,000,000 is presented as a current portion of long term debt on the financials.
The
GrowCo notes investors also received one GrowCo common stock $1 warrant for each $1 invested. These warrants expire on April 30,
2020.
GrowCo
Exchange Notes
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.
As of March 3, 2017, GrowCo had raised $5.0 million, including the $200,000 of notes issued in exchange for the earlier offered
notes. At that time the financing was closed.
During
the year ended December 31, 2016, the Company incurred $493,000 in debt issuance costs related to its GrowCo Exchange Notes offering
and expensed $73,000 to interest expense. The debt issuance costs are being amortized via the effective interest method, using
22.5%, over the life of the notes.
Hemp
Crop Participation Loan
For
the twelve months ended December 31, 2016, DFP issued short term notes, due March 31, 2017, to assist with the payment of crop
inputs. These notes are secured by the Company’s live agriculture products planted during the 2016 calendar year. On August
10, 2016, Wayne Harding, our Chief Executive Officer, invested $7,000 in the DFP Hemp Crop Participation Loan (see Note 11).
Below
is a summary of the Company’s long term debt:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,645,000
|
|
|
$
|
147,000
|
|
|
$
|
7,373,000
|
|
|
|
6
|
%
|
|
Shares
in the Mutual Ditch Company
|
Series
B convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
6
|
%
|
|
F-2
assets
|
CWCB
|
|
|
798,000
|
|
|
|
23,000
|
|
|
|
845,000
|
|
|
|
2.5
|
%
|
|
Certain
Orlando and Farmland assets
|
FirstOak
Bank - Dionisio Farm
|
|
|
771,000
|
|
|
|
12,000
|
|
|
|
771,000
|
|
|
|
(1
|
)
|
|
Dionisio
farmland and 146.4 shares of Bessemer Irrigating Ditch Company Stock, well permits
|
FirstOak
Bank - Dionisio Farm
|
|
|
118,000
|
|
|
|
1,000
|
|
|
|
162,000
|
|
|
|
(2
|
)
|
|
Dionisio
farmland and 9 shares of Bessemer Irrigating Ditch Company Stock, well permits, water leases
|
Seller
Carry Back - Dionisio
|
|
|
590,000
|
|
|
|
4,000
|
|
|
|
590,000
|
|
|
|
6.0
|
%
|
|
Unsecured
|
FirstOak
Bank - Mater
|
|
|
156,000
|
|
|
|
2,000
|
|
|
|
152,000
|
|
|
|
(1
|
)
|
|
Secured
by Mater assets purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McFinney
Agri-Finance
|
|
|
625,000
|
|
|
|
-
|
|
|
|
631,000
|
|
|
|
6.8
|
%
|
|
2,579
acres of pasture land in Ellicott Colorado
|
GrowCo,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GrowCo
$4M notes
|
|
|
4,000,000
|
|
|
|
159,000
|
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
GCP1
land, water taps, Butte Valley water and land
|
GrowCo
$1.5M exchange note
|
|
|
100,000
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
22.5
|
%
|
|
|
GrowCo
$6M exchange note
|
|
|
2,010,000
|
|
|
|
118,000
|
|
|
|
-
|
|
|
|
22.5
|
%
|
|
|
GrowCo
$5M exchange note
|
|
|
2,677,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
10-22.5%
|
|
|
|
Hemp
loan
|
|
|
71,000
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
18
|
%
|
|
Unsecured
|
GCP1
Short Term NP
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22.5
|
|
|
Unsecured
|
Equipment
loans
|
|
|
300,000
|
|
|
|
-
|
|
|
|
385,000
|
|
|
|
5
- 8%
|
|
|
Specific
equipment
|
Total
|
|
|
18,886,000
|
|
|
$
|
550,000
|
|
|
|
14,934,000
|
|
|
|
|
|
|
|
Less:
HCIC discount
|
|
|
-
|
|
|
|
|
|
|
|
(127,000
|
)
|
|
|
|
|
|
|
Less:
GrowCo discount
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
(109,000
|
)
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(12,590,000
|
)
|
|
|
|
|
|
|
(11,068,000
|
)
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
5,766,000
|
|
|
|
|
|
|
$
|
3,630,000
|
|
|
|
|
|
|
|
Notes:
|
(1)
Prime rate + 1.0%, but not less than 6%
|
(2)
Prime rate + 1.5%, but not less than 6%
|
Current
portion long term debt:
|
|
December
31, 2016
|
|
HCIC
seller carry back
|
|
$
|
6,645,000
|
|
CWCB
|
|
|
51,000
|
|
FirstOak
Bank – Dionisio Farm
|
|
|
771,000
|
|
FirstOak
Bank - Dionisio Farm
|
|
|
5,000
|
|
FirstOak
Bank - Mater
|
|
|
156,000
|
|
FNB-Mater
|
|
|
590,000
|
|
McFinney
Agri-Finance
|
|
|
8,000
|
|
GrowCo
note
|
|
|
4,000,000
|
|
GrowCo
$1.5M exchange note
|
|
|
100,000
|
|
Hemp
loan
|
|
|
71,000
|
|
GCP1
Short Term NP
|
|
|
25,000
|
|
Equipment
loans
|
|
|
168,000
|
|
Total
|
|
$
|
12,590,000
|
|
Schedule
of principal payment due by year:
Year
Ending December 31,
|
|
|
Total
|
|
|
2017
|
|
|
$
|
8,590,000
|
|
|
2018
|
|
|
|
53,000
|
|
|
2019
|
|
|
|
674,000
|
|
|
2020
|
|
|
|
4,537,000
|
|
|
2021
& Beyond
|
|
|
|
5,032,000
(1)
|
|
|
Total
|
|
|
$
|
18,886,000
|
|
Note: (1) This amount includes $4,000,000 in GrowCo notes that can be called with a 60-day notice
by Noteholders after April 1, 2016.
NOTE
6 – INFORMATION ON BUSINESS SEGMENTS
We
organize our business segments based on the nature of the products and services offered. We focus on the Water and Greenhouse
business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of
businesses: Greenhouse and Water. Greenhouse contains our leasing of state of the art greenhouses to cannabis growers. Water contains
our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations
may differ from those on the face of the income statement. The Farming Business has been discontinued and therefore the operating
losses and assets have been summarized.
In
the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate,
to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments,
and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating
results for each of the segments of the Company are as follows (in thousands):
|
|
Twelve
Months Ended December 31, 2016
|
|
|
Twelve
Months Ended December 31, 2015
|
|
|
|
Parent
(Two Rivers)
|
|
|
Farms
(DFP)
|
|
|
Greenhouse
(GrowCo., GCP1, GCP2)
|
|
|
Water
(TR Cap)
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
$
|
68
|
|
|
$
|
272
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
947
|
|
|
$
|
10
|
|
|
$
|
957
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203
|
|
|
|
-
|
|
|
|
203
|
|
Gross
Margin
|
|
|
-
|
|
|
|
-
|
|
|
|
204
|
|
|
|
68
|
|
|
|
272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
744
|
|
|
|
10
|
|
|
|
754
|
|
Total
Operating Expenses
|
|
|
(1,208
|
)
|
|
|
-
|
|
|
|
(2,457
|
)
|
|
|
(212
|
)
|
|
|
(3,877
|
)
|
|
|
(1,428
|
)
|
|
|
-
|
|
|
|
(402
|
)
|
|
|
(214
|
)
|
|
|
(2,044
|
)
|
Total
Other Income (Expense)
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(1,463
|
)
|
|
|
(603
|
)
|
|
|
(2,090
|
)
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(600
|
)
|
|
|
(725
|
)
|
|
|
(1,425
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
(1,232
|
)
|
|
|
-
|
|
|
|
(3,716
|
)
|
|
|
(747
|
)
|
|
|
(5,695
|
)
|
|
|
(1,528
|
)
|
|
|
-
|
|
|
|
(258
|
)
|
|
|
(929
|
)
|
|
|
(2,715
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from discontinued operations
|
|
|
-
|
|
|
|
(2,624
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,624
|
)
|
|
|
-
|
|
|
|
(1,025
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,025
|
)
|
Net
Loss from Operations
|
|
|
(1,232
|
)
|
|
|
(2,624
|
)
|
|
|
(3,716
|
)
|
|
|
(747
|
)
|
|
|
(8,319
|
)
|
|
|
(1,528
|
)
|
|
|
(1,025
|
)
|
|
|
(258
|
)
|
|
|
(929
|
)
|
|
|
(3,740
|
)
|
Preferred
dividends
|
|
|
(1,937
|
)
|
|
|
-
|
|
|
|
(671
|
)
|
|
|
-
|
|
|
|
(2,608
|
)
|
|
|
(1,988
|
)
|
|
|
(49
|
)
|
|
|
(374
|
)
|
|
|
-
|
|
|
|
(2,411
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
206
|
|
|
|
(6
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Net
(Loss)
|
|
$
|
(3,169
|
)
|
|
$
|
(2,624
|
)
|
|
$
|
(4,181
|
)
|
|
$
|
(753
|
)
|
|
$
|
(10,727
|
)
|
|
$
|
(3,516
|
)
|
|
$
|
(1,074
|
)
|
|
$
|
(632
|
)
|
|
$
|
(935
|
)
|
|
$
|
(6,157
|
)
|
Segment
Assets
|
|
$
|
726
|
|
|
$
|
2,785
|
|
|
$
|
9,179
|
|
|
$
|
35,077
|
|
|
$
|
47,767
|
|
|
$
|
1,775
|
|
|
$
|
5,158
|
|
|
$
|
7,667
|
|
|
$
|
33,289
|
|
|
$
|
47,889
|
|
NOTE
7 - EQUITY TRANSACTIONS
Common
Stock
The
Company has authorized 100,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of December
31, 2016, was 30,452,075 common shares.
During
the year ended December 31, 2016, the Company had the following common stock transactions:
|
●
|
issued
1,880,948 shares to its former CEO for RSU’s previously awarded
|
|
●
|
returned
35,000 from a former independent board member;
|
|
●
|
issued
127,500 shares to its independent board members for 2015 service;
|
|
●
|
issued
85,000 shares to a former director for RSU’s previously awarded;
|
|
●
|
issued
727,500 shares to an HCIC debt holders in return for reduction in debt;
|
|
●
|
issued
649,700 shares for warrant exercises; and
|
|
●
|
issued
35,616 shares to holders of TR Capital for conversion into the Company’s shares.
|
During
the year ended December 31, 2015, the Company had the following common stock transactions:
|
●
|
issued
130,833 shares to its independent board members for 2014 service;
|
|
●
|
issued
178,080 shares to holders of TR Capital for conversion into the Company shares;
|
|
●
|
issued
59,360 shares to holders of F-2 Preferred Shares who converted into the Company shares;
|
|
●
|
issued
2,000 shares to a consultant for work performed in 2016; and
|
|
●
|
issued
86,000 shares to a previous board member from a prior RSU grant.
|
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
|
|
Former
Director
|
|
|
1,023,200
|
|
|
|
Jul-06
|
|
|
Jul-06
|
|
Satisfied
|
|
Jul-16
|
|
$
|
1.25
|
|
|
|
-
|
|
Consultants
|
|
|
966,667
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
$
|
1.25
|
|
|
|
-
|
|
Total
|
|
|
1,989,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If
all of the options were exercised, $2,487,000 would be collected by the Company and yield an average share price of $1.25.
There
were no options issued under the 2005 Plan for the years ending December 31, 2016 and 2015.
A
summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding
December 21, 2014
|
|
|
1,989,867
|
|
|
$
|
1.25
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2015
|
|
|
1,989,867
|
|
|
|
1.25
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2016
|
|
|
1,989,867
|
|
|
$
|
1.25
|
|
Options
Exercisable, December 31, 2016
|
|
|
1,989,867
|
|
|
$
|
1.25
|
|
For
the year ended December 31, 2016, the Company extended 600,000 options that were due to expire in 2016 and 2017 to an expiration
dates in 2018 and 2019. This extension resulted in $52,000 of expense being recorded in 2016.
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
|
|
|
600,000
|
|
|
|
Aug
‘16
|
|
|
Various
|
|
Ongoing
|
|
Aug-’26
|
|
|
Variable
|
|
|
|
-
|
|
Directors
|
|
|
600,000
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
$
|
0.53
|
|
|
|
-
|
|
Employees
|
|
|
610,000
|
|
|
|
June
‘16
|
|
|
Various
|
|
Ongoing
|
|
Jun-’26
|
|
$
|
0.30
|
|
|
|
-
|
|
Others
|
|
|
2,363,448
|
|
|
|
Various
|
|
|
Various
|
|
Satisfied
|
|
Various
|
|
|
Variable
|
|
|
|
-
|
|
Total
|
|
|
4,173,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
2016
|
|
|
2015
|
|
Expected
stock price volatility
|
|
|
142
|
%
|
|
|
72
|
%
|
Risk-free
interest rate
|
|
|
0.83
|
%
|
|
|
1.45
|
%
|
Expected
option life (years)
|
|
|
5.00
|
|
|
|
3.63-4.58
|
|
Expected
annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company arrived at the foregoing estimate of volatility of the Company’s common stock based on the Company’s stock
closing price on a weekly basis and averaged over the prior five years. The risk-free rate for periods within the expected term
of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The Company believes these estimates
and assumptions are reasonable. However, these estimates and assumptions may change in the future based on actual experience as
well as market conditions.
A
summary of the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”) is as follows:
|
|
Shares
|
|
Outstanding
December 31, 2014
|
|
|
2,445,948
|
|
Granted
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
December 31, 2015
|
|
|
2,445,448
|
|
Granted
|
|
|
1,810,000
|
|
Cancelled
|
|
|
-
|
|
Expired
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
December 31, 2016
|
|
|
4,173,448
|
|
Exercisable,
December 31, 2016
|
|
|
2,725,948
|
|
The
option expense from both the 2011 and 2005 Plans were $180,000 and $31,000 for the years ended December 31, 2016 and 2015, respectively.
Under
the 2011 Plan, we have issued the following Restricted Stock Units (RSUs):
Grantee
|
|
Company
Relationship
|
|
RSUs
issued
|
|
|
Date
of Grant
|
|
|
Vesting
Date
|
|
Performance
Requirement
|
|
Exercised
to Date
|
|
Jolee
Henry
|
|
Prior
Director
|
|
|
400,000
|
|
|
|
Oct-10
|
|
|
Jan-11
|
|
n/a
|
|
|
171,000
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
171,000
|
|
The
Company can issue stock awards and options for nonemployee services. If stock is granted, the Company values the stock using an
average of the closing price of the Company’s stock over the period that the service was rendered. If options are granted,
the Company uses the Black-Scholes model for determining fair value (see above).
Warrants
As
of December 31, 2016, 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
|
|
Wedbush
Securities
|
|
Financial
Advisor
|
|
|
200,000
|
|
|
|
Jun-12
|
|
|
|
Jun-12
|
|
|
|
Jun-17
|
|
|
$
|
1.20
|
|
Dionisio
Farms & Produce, Inc.
|
|
Investors
in subsidiary
|
|
|
95,500
|
|
|
|
Dec-12
|
|
|
|
Dec-12
|
|
|
|
Dec-17
|
|
|
$
|
3.00
|
|
Two
Rivers Farms F-1
|
|
Prior
creditor in F1
|
|
|
12,500
|
|
|
|
Dec-12
|
|
|
|
Dec-12
|
|
|
|
Dec-17
|
|
|
$
|
3.00
|
|
Two
Rivers Farms F-2
|
|
Investors
in subsidiary
|
|
|
233,500
|
|
|
|
Dec-12
|
|
|
|
Dec-12
|
|
|
|
Dec-17
|
|
|
$
|
3.00
|
|
HCIC
Note Holders
|
|
Creditors
|
|
|
839,500
|
|
|
|
Jun-13
|
|
|
|
Jun-13
|
|
|
|
Jun-18
|
|
|
$
|
3.00
|
|
TR
Capital Partners, LLC
|
|
Investors
|
|
|
14,168,944
|
|
|
|
2014
|
|
|
|
2014
|
|
|
|
Jan-19
|
|
|
$
|
2.10
|
|
GrowCo
Exchange Note
|
|
Creditors
|
|
|
700,000
|
|
|
|
Apr-16
|
|
|
|
Apr-16
|
|
|
|
May-21
|
|
|
$
|
0.50
|
|
|
|
|
|
|
16,549,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
warrants are priced at the same price per share as the expected equity offering and expire one year after the completion of
the expected equity offering.
|
For
the years ended December 31, 2016 and 2015, warrant expense totaled $327,000 and $55,000, respectively.
TR
Capital Preferred Membership Units
The
30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common
stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20,
Debt (and other convertible instruments with beneficial convertible features (“BCF”),
the Company determined
that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000
were recorded for the year ended December 31, 2014. On the balance sheet as of December 31, 2014, these amounts were recorded
as retained earnings and as additional paid in capital, respectively, and are representative of preferred share dividends available
to non-controlling interest holders in the entity.
Note
8 – INCOME TAXES
The
Company accounts for income taxes in accordance with ASC 740, Income Taxes (formerly Statement of Financial Accounting Standard
No., 109, Accounting for Income Taxes). Under the provisions of ASC 740, a deferred tax asset or liability (net of a valuation
allowance) is provided in the financial statements by applying the provisions of applicable laws to measure the deferred tax consequences
of temporary differences that will result in taxable or deductible amounts in future years as a result of events recognized in
the financial statements in the current or proceeding years.
The
items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes
consists of the following:
Effective
tax rate
|
|
|
|
Federal
statutory rate
|
|
|
34.00
|
%
|
Effect
of:
|
|
|
|
|
State
taxes, net of federal benefit
|
|
|
3.06
|
%
|
Permanent
items
|
|
|
-10.09
|
%
|
Return
to Provision Adjustment
|
|
|
-1.58
|
%
|
Other
Adjustment
|
|
|
-1.64
|
%
|
Valuation
allowance
|
|
|
-23.74
|
%
|
Effective
income tax rate
|
|
|
0.00
|
%
|
Book
loss reconciliation to estimated taxable income is as follows (in thousands):
|
|
2016
|
|
|
2015
|
|
Book
loss
|
|
$
|
(10,933
|
)
|
|
$
|
(6,157
|
)
|
Tax
adjustments:
|
|
|
|
|
|
|
|
|
Stock
Based Comp
|
|
|
61
|
|
|
|
-
|
|
Stock
Comp Exercised
|
|
|
(33
|
)
|
|
|
-
|
|
Capital
Expenses
|
|
|
2,629
|
|
|
|
2,416
|
|
Meals
& Entertainment
|
|
|
6
|
|
|
|
16
|
|
Warrant
Expense
|
|
|
327
|
|
|
|
86
|
|
Political
Contributions
|
|
|
16
|
|
|
|
20
|
|
Donations
|
|
|
-
|
|
|
|
-
|
|
Depreciation
|
|
|
514
|
|
|
|
169
|
|
Amortization
|
|
|
834
|
|
|
|
(43
|
)
|
Estimate
of taxable income
|
|
$
|
(6,579
|
)
|
|
$
|
(3,493
|
)
|
Income
tax provision is summarized below (in thousands):
|
|
2016
|
|
|
2015
|
|
Current
expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total
current
|
|
|
-
|
|
|
|
-
|
|
Deferred
expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,382
|
)
|
|
|
(1,230
|
)
|
State
|
|
|
(214
|
)
|
|
|
(111
|
)
|
Total
deferred
|
|
|
(2,596
|
)
|
|
|
(1,341
|
)
|
Less:
Valuation allowance
|
|
|
2,596
|
|
|
|
1,341
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
We
will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. At
December 31, 2016 we had no unrecognized tax benefits in income tax expense, and do not expect any in 2016. Our income tax returns
are no longer subject to Federal tax examinations by tax authorities for years before 2013 and state examinations for years before
2013.
The
components of the deferred tax asset are as follows (in thousands):
Cumulative
Calculations:
|
|
2016
|
|
|
2015
|
|
Current
deferred tax asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
(16,319
|
)
|
|
$
|
(13,996
|
)
|
Capital
loss
|
|
|
(10
|
)
|
|
|
(27
|
)
|
Bargain
purchase
|
|
|
643
|
|
|
|
643
|
|
RSU
& stock option expense
|
|
|
(1,995
|
)
|
|
|
(1,984
|
)
|
Fixed
Assets and Intangibles
|
|
|
(214
|
)
|
|
|
65
|
|
Charitable
Contributions
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Bad
Debt
|
|
|
-
|
|
|
|
-
|
|
Total
cumulative deferred tax assets
|
|
|
(17,899
|
)
|
|
|
(15,303
|
)
|
Valuation
allowance
|
|
|
17,899
|
|
|
|
15,303
|
|
Effective
income tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2016 and December 31, 2015, the deferred tax asset of $17,889,000 and $15,303,000, respectively,
has a valuation allowance of $17,899,000 and $15,303,000, respectively, since management has determined the tax benefit cannot
be reasonably assured of being used in the near future. The net operating loss carryforward, if not used, will begin to expire
in 2029, and is severely restricted as per the Internal Revenue Code if there is a change in ownership. The following is a summary
of the combined net operating loss carryforward (in thousands):
|
|
|
Federal
|
|
|
Colorado
|
|
|
12/31/15
|
|
|
$
|
37,456
|
|
|
$
|
37,456
|
|
|
12/31/16
|
|
|
|
6,579
|
|
|
|
6,579
|
|
|
Balance
|
|
|
$
|
44,035
|
|
|
$
|
44,035
|
|
Note
9 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $10,700,000
and $6,157,000 during the years ended December 31, 2016 and 2015, respectively. At December 31, 2016, the Company has a working
capital deficit and a stockholders’ deficit of approximately $16,534,000 and $84,000,000, respectively. The HCIC seller
carry back debt is in technical default.
These
factors raise doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification
of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe
management’s plans to mitigate.
The
$4M GrowCo Note is classified as current due to the holders’ right to call the note upon 60-day’s notice. We do not
believe that these holders will exercise their call option. The HCIC debt of $6.6 million is secured by water and land assets
that are valued at approximately $24 million. Should the holders of the HCIC debt demand payment, the value of these assets make
the debt re-financeable.
Since
December 31, 2016 to March 21, 2017 the Company has collected $600,000 under its GrowCo Exchange Note offerings. Beginning the
second quarter of 2016, GrowCo will begin receiving rent payments on the first greenhouse. The first use of these funds will be
to pay GCP1 accounts payable. In addition, the Company has received $257,000 in preferred investment into its Water Redevelopment
subsidiary. Another $500,000 is expected to be raised in a second Water Redevelopment offering. On March 24, 2017, we have signed
a term sheet for a $3,000,000 PIPE (private investment in public entity) financing which will provide additional capital to satisfy
our working capital and capital expenditures during the coming twelve months. The proceeds will also be used to retire some of
our debt. The entire amount will be provided to the Company after signing of the definitive documents which we expect in April
or May of 2017.
Additionally,
we have substantially reduced by general and administrative and cash required for our operations as we have sold our irrigating
farming business and reduced staff.
Management
Plans
The
Company has implemented a new strategy involving focusing on its water assets along with associated capital raises. On March 13,
2017, we have raised $257,000 as the first round of funding of our new water initiative. We plan to continue capital raises to
fund our water initiatives.
We
believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical
operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However,
we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional
financing, or whether such actions would generate the expected liquidity as currently planned.
NOTE
10 - COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
January 2016, the Company entered into a new lease with the Colorado Center in Denver Colorado for the corporate headquarters.
The space is 1,775 square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The
lease terminates on June 30, 2018. On March 1, 2017 the Company entered into a sub-lease agreement with our related party McGrow
for these office facilities.
The
amounts due at the base rate are as follows:
Period
|
|
|
Amount
Due
|
|
|
2017
|
|
|
$
|
47,000
|
|
|
2018
|
|
|
$
|
23,000
|
|
In
February 2017 we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This
space is 1,554 square feet and monthly payments of $2,201 which will begin April 1, 2017. The lease terminates on March 31, 2020.
The amounts due at the base rate are as follows:
Period
|
|
|
Amount
Due
|
|
|
2017
|
|
|
$
|
24,000
|
|
|
2018
|
|
|
$
|
28,000
|
|
|
2019
|
|
|
$
|
28,000
|
|
Two
Rivers has entered into a water lease arrangement with Pueblo Board of Water Works. The lease is effective in 2012, has a term
of five years, and calls for annual payments of $100,000 beginning in April 2012. The annual payments can be escalated based upon
the percentage increase, if any, over the previous year of the PBWW water rates for its general customers for treated water. The
lease is for up to 500 acre feet of water per year. There are no further obligations under this lease.
The
purpose of the lease is two-fold: a) to establish an appropriation of a water right for exchange from the Arkansas River main
stream water to various Two Rivers’ reservoirs, and b) to provide supplemental irrigation water for our farming operations
through releases from those reservoirs.
Defined
Contribution Plan
Two
Rivers does not have a defined contribution plan.
Employment
Agreements
Effective
January 1, 2011, the Company entered into an employment agreement with Wayne Harding, as CFO. The initial term of the contract
was one year, which renews automatically for successive one-year terms unless and until either party delivers notice of termination
within 30 days of the expiration of the then current term.
The
Board determines annual incentive compensation at the Board’s sole discretion. If there is a change of control, each is
entitled to an accelerated option vesting.
GCP
2 Construction
The
GCP 2 greenhouse is partially completed. We estimate that the cost to complete the second greenhouse is approximately $3,000,000.
Suncanna
Litigation
In
2016, the Suncanna lease arrangement has been the subject of administrative and judicial proceedings:
|
●
|
On
April 14, 2016, we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
|
|
|
|
|
●
|
Due
to the suspension order, Suncanna was in violation of its lease agreement with us. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna. Consequently, during the quarter ended March 31, 2016, we stopped recognizing
lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent that had been recorded as of December
31, 2015. We also wrote off advances to Suncanna totaling $587,000.
|
|
|
|
|
●
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate
the greenhouse by September 6, 2016.
|
|
|
|
|
●
|
On
August 31, 2016, a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
|
|
|
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and
began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016.
|
|
|
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this
decision.
|
Management
believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna
lease agreement
Note
11 – RELATED PARTY TRANSACTIONS
Pursuant
to ASC 850 “Related Party Disclosure”, 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 2016 TR Capital Partners, LLC’s subsidiary GCP1 signed a lease agreement for greenhouse 1 with Johnny Cannaseed,
a company formed and operated by John McKowen.
|
|
●
|
In
June 2016 the Company’s subsidiary GCP2 signed a lease agreement for greenhouse 2 with Johnny Cannaseed.
|
|
●
|
In
July 2016 the Company’s subsidiary GrowCo signed a series of agreements with McGrow, LLC, a Colorado limited liability
company that is headed and partially owned by John McKowen. The agreements included a Master Agreement, and Advisory Services
agreement, a Construction Services agreement, a Financing Services agreement, a Non-Compete and Exclusivity agreement, and
a Stock Purchase Agreement. Collectively these are known as the “McGrow Agreements”. As a result of these agreements
GrowCo paid McGrow for services provided primarily for the construction of greenhouses and fees associated with the raising
of capital.
|
The
following is a list of all related party transactions during the year ended 12/31/16:
|
o
|
Advance
of $33,599 for expenses incurred for greenhouse supplies.
|
|
o
|
Revenue
recorded of $178,609 for greenhouse lease.
|
|
o
|
Advance
of $8,295 for services rendered.
|
|
o
|
Advance
of $5,000 for services rendered.
|
|
o
|
Expense
payment of $374,526 for services rendered.
|
|
o
|
Fees
paid of $107,250 for financing services.
|
|
o
|
Advance
of $12,548 for services rendered.
|
|
o
|
The
Company entered into a subleasing agreement whereby McGrow will pay $47K per year for office space leased by the Company.
|
|
●
|
John
McKowen (former CEO of Two Rivers)
|
|
o
|
Interest
expense of $85,630 on investment into GCP Super Units.
|
|
o
|
Payment
of office space of $ 29,458 while CEO of Two Rivers.
|
|
o
|
Equity
investment of $496,000 in GCP Super Units.
|
|
o
|
Equity
compensation in the form of GrowCo common shares valued at $100,000 for services provided.
|
|
o
|
Fees
of $71,864 for GrowCo capital raised.
|
|
o
|
Short-term
loan to the Company of $5,000 .
|
|
o
|
Short-term
loan to the Company of $7,000.
|
|
o
|
Invested
$100,000 in the GrowCo $4M Note.
|
|
●
|
Russ
Dionisio, our former employee and operator of DFP Farming holds a seller carry-back note for which the Company owes $590,000.
|
|
|
|
|
●
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have invested approximately $8.5 M in GrowCo
securities and DFP short term loans.
|
|
|
|
|
●
|
Board
Members
|
|
o
|
Samuel
Morris $5,000 short-term loan to the Company.
|
|
o
|
Michael
Harnish invested $35,000 in the GrowCo $6M Exchange Note prior to becoming a board member.
|
Note
12 – SUBSEQUENT EVENTS
Pursuant
to FASB ASC 855, Management has evaluated all events and transactions that occurred from December 31, 2016 through the date of
issuance of these financial statements. During this period, we did not have any significant subsequent events, except as disclosed
below:
|
●
|
The
Company formed Water Redevelopment Company (“Water Redevelopment”), a Delaware corporation, to focus on its water
development. Presently the Company owns 99% of Water Redevelopment. All of the Company’s water related assets and related
debt and accounts payable were transferred into Water Redevelopment.
|
|
●
|
As
part of its ongoing From D registration statement offering for GrowCo’s offering in GrowCo Exchange Notes, the Company
has collected an additional $300,000 to total $5,037,000.
|
|
●
|
The
Company, through its subsidiary GrowCo, began offering a $2,000,000 GrowCo Exchange note. This note accrues interest at 22.5%,
with interest deferred until GrowCo becomes operationally cash flow positive. The Company has collected $300,000 total on
this Exchange Note.
|
|
●
|
On
March 3, 2017 the Company sold all of its land and associated water rights for a gross sales price of $1,740,000. Proceeds
will be used to first pay secured creditors and then unsecured creditors.
|
|
●
|
On
March 1, 2017 the Company entered into a sub-lease agreement effective April 1, 2017 with a related party McGrow for the entirety
of the office facilities at the Colorado Center (see Note 11).
|
|
●
|
On
March 13, 2017 the Company raised $257,000 from private investors in a Preferred A financing round for its Water Redevelopment
subsidiary.
|
|
●
|
On
March 24, 2017 the Company and an investor signed a term sheet for a PIPE (private investment in public entity) financing
transaction that will provide $3,000,000 to the company once definitive documents are signed.
|
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In
thousands, except for number of shares)
|
|
September
30, 2017 (unaudited)
|
|
|
December
31, 2016
(derived from audit as restated)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
102
|
|
|
$
|
150
|
|
Accounts
receivable
|
|
|
5
|
|
|
|
-
|
|
Accounts
receivable related party, net
|
|
|
1,514
|
|
|
|
240
|
|
Deposits
and other current assets
|
|
|
120
|
|
|
|
5
|
|
Assets
of discontinued operations held for sale
|
|
|
-
|
|
|
|
2,785
|
|
Total
Current Assets
|
|
|
1,741
|
|
|
|
3,180
|
|
Long
Term Assets:
|
|
|
|
|
|
|
|
|
Property,
equipment and software, net of current portion
|
|
|
214
|
|
|
|
599
|
|
Land
|
|
|
3,602
|
|
|
|
3,803
|
|
Water
assets
|
|
|
31,223
|
|
|
|
31,183
|
|
Greenhouse
and infrastructure
|
|
|
5,407
|
|
|
|
5,402
|
|
Construction
in progress
|
|
|
3,968
|
|
|
|
3,520
|
|
Accounts
receivable related party, net
|
|
|
1,241
|
|
|
|
-
|
|
Other
long term assets
|
|
|
85
|
|
|
|
80
|
|
Total
Long Term Assets
|
|
|
45,740
|
|
|
|
44,587
|
|
TOTAL
ASSETS
|
|
$
|
47,481
|
|
|
$
|
47,767
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
966
|
|
|
$
|
1,495
|
|
Accrued
liabilities
|
|
|
1,534
|
|
|
|
695
|
|
Current
portion of notes payable
|
|
|
13,307
|
|
|
|
10,780
|
|
Preferred
dividend payable
|
|
|
4,984
|
|
|
|
3,105
|
|
Liabilities
of discontinued operations held for sale
|
|
|
320
|
|
|
|
2,841
|
|
Total
Current Liabilities
|
|
|
21,111
|
|
|
|
18,916
|
|
Security
deposit
|
|
|
16
|
|
|
|
-
|
|
Notes
Payable, net of current portion and unamortized debt issuance costs
|
|
|
5,121
|
|
|
|
5,556
|
|
Total
Liabilities
|
|
|
26,248
|
|
|
|
24,472
|
|
Commitments
& Contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 32,472,221and 30,452,075 shares issued and outstanding at September
30, 2017 and December 31, 2016
|
|
|
33
|
|
|
|
31
|
|
Additional
paid-in capital
|
|
|
76,615
|
|
|
|
75,142
|
|
Accumulated
(deficit)
|
|
|
(87,393
|
)
|
|
|
(84,244
|
)
|
Total
Two Rivers Water Company Shareholders' Equity
|
|
|
(10,745
|
)
|
|
|
(9,071
|
)
|
Noncontrolling
interest in subsidiary
|
|
|
31,978
|
|
|
|
32,366
|
|
Total
Stockholders' Equity
|
|
|
21,233
|
|
|
|
23,295
|
|
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
$
|
47,481
|
|
|
$
|
47,767
|
|
The
accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(In
Thousands, except Per Share Data)
(Unaudited)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing
– Greenhouse (related party)
|
|
$
|
1,006
|
|
|
$
|
-
|
|
|
$
|
2,865
|
|
|
$
|
25
|
|
Other
|
|
|
16
|
|
|
|
7
|
|
|
|
40
|
|
|
|
40
|
|
Total
Revenue
|
|
|
1,022
|
|
|
|
7
|
|
|
|
2,905
|
|
|
|
65
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
625
|
|
|
|
617
|
|
|
|
1,201
|
|
|
|
2,717
|
|
Depreciation
and amortization
|
|
|
94
|
|
|
|
46
|
|
|
|
343
|
|
|
|
152
|
|
Total
operating expenses
|
|
|
719
|
|
|
|
663
|
|
|
|
1,544
|
|
|
|
2,869
|
|
Profit
(Loss) from Operations
|
|
|
303
|
|
|
|
(656
|
)
|
|
|
1,361
|
|
|
|
(2,804
|
)
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense)
|
|
|
(717
|
)
|
|
|
(463
|
)
|
|
|
(1,905
|
)
|
|
|
(1,262
|
)
|
Warrant
expense
|
|
|
(93
|
)
|
|
|
-
|
|
|
|
(93
|
)
|
|
|
-
|
|
Gain
(loss) on disposal of assets
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Other
income
|
|
|
-
|
|
|
|
8
|
|
|
|
9
|
|
|
|
47
|
|
Total
other income (expense)
|
|
|
(882
|
)
|
|
|
(455
|
)
|
|
|
(1,980
|
)
|
|
|
(1,215
|
)
|
Net
(Loss) from Continuing Operations before Taxes
|
|
|
(579
|
)
|
|
|
(1,111
|
)
|
|
|
(619
|
)
|
|
|
(4,019
|
)
|
Income
tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from discontinued operations
|
|
|
(92
|
)
|
|
|
77
|
|
|
|
(1,174
|
)
|
|
|
(316
|
)
|
Net
(Loss)
|
|
|
(671
|
)
|
|
|
(1,035
|
)
|
|
|
(1,793
|
)
|
|
|
(4,335
|
)
|
Net
loss (income) attributable to noncontrolling interest
|
|
|
395
|
|
|
|
1
|
|
|
|
538
|
|
|
|
(7
|
)
|
Net
Income (Loss)
|
|
|
(276
|
)
|
|
|
(1,034
|
)
|
|
|
(1,255
|
)
|
|
|
(4,342
|
)
|
Preferred
shareholder distributions
|
|
|
(686
|
)
|
|
|
(695
|
)
|
|
|
(1,880
|
)
|
|
|
(1,938
|
)
|
Net
Loss Attributable to Common Shareholders
|
|
$
|
(962
|
)
|
|
$
|
(1,729
|
)
|
|
$
|
(3,135
|
)
|
|
$
|
(6,280
|
)
|
Profit
(Loss) Per Common Share - Basic and Dilutive:
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.22
|
)
|
Weighted
Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and dilutive
|
|
|
31,974
|
|
|
|
28,064
|
|
|
|
31,571
|
|
|
|
27,957
|
|
The
accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In
Thousands)
(Unaudited)
|
|
For
the Nine Months Ended
September 30
|
|
|
|
2017
|
|
|
2016
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
(Loss)
|
|
$
|
(3,673
|
)
|
|
$
|
(6,280
|
)
|
Adjustments
to reconcile net income or (loss) to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
344
|
|
|
|
542
|
|
Accretion
of debt discount
|
|
|
326
|
|
|
|
177
|
|
Loss
from debt extinguishment
|
|
|
70
|
|
|
|
-
|
|
Write
off of Suncanna receivable and advance
|
|
|
-
|
|
|
|
910
|
|
Stock
Option and Warrant expense
|
|
|
728
|
|
|
|
14
|
|
In-kind
distributions
|
|
|
-
|
|
|
|
495
|
|
Loss
(gain) on write down of assets related to property and equipment
|
|
|
578
|
|
|
|
-
|
|
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
32
|
|
|
|
(1,235
|
)
|
(Increase)
in accounts receivable, related party
|
|
|
(2,515
|
)
|
|
|
-
|
|
Decrease
in farm product
|
|
|
-
|
|
|
|
(1,135
|
)
|
(Increase)
decrease in deposits, prepaid expenses and other assets
|
|
|
(63
|
)
|
|
|
(11
|
)
|
Increase
(decrease) in accounts payable
|
|
|
(987
|
)
|
|
|
2,978
|
|
Increase
in distribution payable to preferred shareholders
|
|
|
1,881
|
|
|
|
1,093
|
|
Increase
in accrued liabilities and other
|
|
|
820
|
|
|
|
329
|
|
Net
Cash (Used in) Operating Activities
|
|
|
(2,459
)
|
|
|
|
(2,123
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(79
|
)
|
|
|
-
|
|
Proceeds
from sale of property and equipment
|
|
|
945
|
|
|
|
(125
|
)
|
Purchase
of land, water shares, infrastructure
|
|
|
-
|
|
|
|
(446
|
)
|
Construction
in progress
|
|
|
(616
|
)
|
|
|
(2,163
|
)
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
250
|
|
|
|
(2,734
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
GrowCo
LLC preferred membership offerings
|
|
|
-
|
|
|
|
1,095
|
|
Proceeds
from sale of preferred membership units
|
|
|
252
|
|
|
|
-
|
|
Proceeds
from warrant exercises
|
|
|
209
|
|
|
|
-
|
|
Proceeds
from long-term debt
|
|
|
2,236
|
|
|
|
4,199
|
|
Payment
on notes payable
|
|
|
(536
|
)
|
|
|
(355
|
)
|
Net
Cash Provided by Financing Activities
|
|
|
2,161
|
|
|
|
4,939
|
|
Net
Increase (Decrease) in Cash & Cash Equivalents
|
|
|
(48
|
)
|
|
|
82
|
|
Beginning
Cash & Cash Equivalents
|
|
|
150
|
|
|
|
521
|
|
Ending
Cash & Cash Equivalents
|
|
$
|
102
|
|
|
$
|
603
|
|
Continued
on next page
Continued
from previous page
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid for interest, net of $122 and $132 respectively capitalized into CIP
|
|
$
|
961
|
|
|
$
|
835
|
|
Land
exchanged for debt
|
|
$
|
1,606
|
|
|
$
|
-
|
|
Shares
issued in exchange for debt
|
|
$
|
322
|
|
|
$
|
-
|
|
Conversion
of TR Cap into Two Rivers common shares
|
|
$
|
70
|
|
|
$
|
-
|
|
Conversion
of Accounts Payable into Water Redev preferred shares
|
|
$
|
100
|
|
|
$
|
-
|
|
The
accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Nine Months Ended September 30, 2017 and September 30, 2016
(Unaudited)
(a) NOTE
1 – ORGANIZATION AND BUSINESS
Unless
the context requires otherwise, references in these notes to “Two Rivers,” the “Company,” “we,”
“our,” “us” and similar terms are to Two Rivers Water & Farming Company and its subsidiaries.
Corporate
Evolution
In
2014, we formed a new company, TR Capital Partners, LLC or TR Capital, which issued all its common units to Two Rivers Water &
Farming Company, and our direct and indirect subsidiaries entered into a series of related transactions as the result of which
assets and operations of those subsidiaries were transferred to TR Capital. As a result, TR Capital operates or controls all of
the operations formerly conducted by those subsidiaries, and we classify TR Capital as Two Rivers Water & Farming Company
for purposes of our financial statements. Two Rivers has divided its operations into our traditional lines of business of farming
and water, which are operated by us, and our cannabis-focused business, which is operated by our subsidiary GrowCo, Inc., or GrowCo.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of September 30,
2017, we owned 6,942 gross acres.
In
May 2014, we formed GrowCo, which issued 20,000,000 shares of its common stock to Two Rivers. In August 2014, we announced that
we were reserving 10,000,000 of the GrowCo shares for distribution to holders of our Common Stock as of four record dates (January
1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after a registration statement covering GrowCo common shares has been
filed and declared effective, which has not yet occurred. On each record date, we recorded a pending distribution of 2,500,000
GrowCo common shares on a pro rata basis to holders of Common Stock.
On
January 20, 2015, GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which
consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land. GCP1’s
greenhouse was partially occupied in September with lease revenue beginning September 1, 2015. On April 14, 2016, we received
notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that the then current tenant, Suncanna, LLC
(“Suncanna”), had received a suspension order. This suspension, in addition to non-payment of back due lease payments
owed, caused Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 began the eviction process against Suncanna.
Due to the eviction process, during the nine months ended September 30, 2016, we wrote off $743,000 in Lease Revenues –
Related Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. During
the nine months ended September 30, 2016, we recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna
in early April 2016. The total write off of $1.330 million was partially offset by a $350,000 reduction in the amount owed to
the GCP1 preferred unit holders. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate GCP1’s greenhouse by September 6, 2016. On August 31, 2016, a lawsuit was filed by Aaron
Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against GrowCo, GrowCo Business Development, LLC.,
GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees, and associates. The Company believes
that the suit has no merit and will have no material impact on the Company’s financial condition.
Our
second greenhouse project will also consist of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse
facility on an additional 40 acres of land. Upon completion, this project will be operated, as a landlord, by GrowCo Partners
2, LLC, or GCP 2. GCP 2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an expected completion in mid-2018.
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of debt securities, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
December 2015, GrowCo completed a $5.1 million private placement of equity interests of GCP Super Units, LLC, which will invest
directly in various assets of GrowCo, with proceeds to be used to complete the construction of the first greenhouse, partially
fund the second greenhouse and provide working capital. Our investment in GCP Super Units, LLC is reflected on our balance sheet
as a non-controlling equity interest.
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, 1.00
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.
As of March 7, 2017, GrowCo had raised $5.0 million, including the $200,000 of notes issued in exchange for the earlier offered
notes, at which time the offering was closed. A $2M offering was subsequently initiated in March 2017 with substantially the same
terms for the purposes of finishing the second greenhouse. As of November 7, 2017, $1,520,000 had been raised in this offering.
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 Redev’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 along with its farming, water and
greenhouse operations. All significant inter-company balances and transactions have been eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S.
GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information
not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results
for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ended
December 31, 2017. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s
consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2016, as filed with the Securities and Exchange Commission on March 30, 2017.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
TR
Capital
|
|
$
|
20,482,000
|
|
|
$
|
20,552,000
|
|
HCIC
|
|
|
1,370,000
|
|
|
|
1,381,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(746,000
|
)
|
|
|
(206,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
3,601,000
|
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
4,923,000
|
|
|
|
4,923,000
|
|
Water
Redevelopment Company, LLC
|
|
|
253,000
|
|
|
|
-
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
497,000
|
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
460,000
|
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
495,000
|
|
|
|
495,000
|
|
Totals
|
|
$
|
31,978,000
|
|
|
$
|
32,366,000
|
|
In
2015, $152,000 of TR Capital Preferred Membership units were exchanged, pursuant to a pre-existing exchange agreement, for Two
Rivers’ common shares and $60,000 of Two Rivers Farms F-2, Inc. (“F-2”) membership units converted into Two
Rivers’ common shares. Two Rivers also formed three LLC special entities (TR Cap 20160630 Distribution, TR Cap 20160930
Distribution, and TR Cap 20161231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership
units.
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 condensed consolidated 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 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.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset, which ranges from three to twenty-seven and a half years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the
related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged
to income.
Below
is a summary of premises and equipment:
Asset
Type
|
|
Life
in Years
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Office
equipment, furniture
|
|
|
5
– 7
|
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
Computers
|
|
|
3
|
|
|
|
47,000
|
|
|
|
47,000
|
|
Vehicles
|
|
|
5
|
|
|
|
76,000
|
|
|
|
116,000
|
|
Farm
equipment
|
|
|
7
– 10
|
|
|
|
299,000
|
|
|
|
1,632,000
|
|
Irrigation
system
|
|
|
10
|
|
|
|
-
|
|
|
|
995,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
15,000
|
|
|
|
393,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
455,000
|
|
|
|
3,201,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(241,000
|
)
|
|
|
(1,842,000
|
)
|
Net
book value
|
|
|
|
|
|
$
|
214,000
|
|
|
$
|
1,359,000
|
|
Land
Land
acquired for farming or water rights is recorded at cost. 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 or whenever events and circumstances indicate the carrying value may not be recoverable, Management will assess the value
of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.
Water
Rights and Infrastructure
Management
periodically evaluates the carrying value of its assets including water rights and infrastructure, and if the carrying value is
in excess of fair market value, the Company will establish an impairment allowance. Currently, there is a $30,000 impairment reserve
on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.
Intangibles
Two
Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in Huerfano Cucharas
Irrigation Company (“HCIC”) and Orlando Reservoir No. 2 Company, LLC (“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.
Revenue
Recognition
Lease
Revenues
The
lease between GCP1, a subsidiary of TR Cap, and its related party lessee, Suncanna, was classified as an operating lease under
ASC 840. Our lease with Johnny Cannaseed, our current tenant and a related party, is also classified as an operating lease. Payments
under the lease agreements with Johnny Cannaseed are deferred for seven months after occupancy and these deferred rent payments
will be repaid over a period of 24 months after payments begin.
On
April 14, 2016, we received notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that Suncanna
had received a suspension order. This caused Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 began an eviction
process against Suncanna. Due to the eviction process, during the nine months ended September 30, 2016, we wrote off $743,000
in Lease Revenues – Related Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues
– Related Party. The total write off of $1.330 million is partially off-set by a $350,000 reduction in the amount owed to
the GCP1 preferred unit holders.
On
July 22, 2016 GCP1 received a court ordered Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna,
the Company’s then tenant in its marijuana-focused greenhouse, to vacate the greenhouse by September 6, 2016. On September
6, 2016, the Company took possession of the greenhouse and began re-conditioning it for the new tenant which began growing operations
in one half of the greenhouse in December 2016.
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 condensed consolidated financial statements. The assessments that are not eliminated
are included in Other revenue.
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.
Net
(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 118,000 RSUs, 6,163,315 options, and 17,533,944 warrants at September 30, 2017, has not been
included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases”. The new standard
establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet
for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning
after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected
to result in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management
believes that this ASU will have an impact on its financials and is in the process of analyzing its impact.
In
August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09,
“
Revenue from Contracts with Customers
”, which amended revenue recognition guidance to clarify the principles
for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record the transfer
of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange
for those goods or services. Expanded additional disclosures are required relating to the nature, amount, timing, and uncertainty
of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required
about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill
a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one
of two prescribed retrospective methods. Early adoption is not permitted. At this point, due to the Company having no revenue
contracts with customers, except for leasing agreements, Management believes that there will be no material impact on its financial
statements.
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 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon
purchasing land, the value is recorded at the purchase price or fair value, whichever is more appropriate. Costs incurred to prepare
the land for the intended purpose are 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. It has obtained water rights through the purchase
of shares in a mutual ditch company, which it accomplished through its purchase of shares in HCIC, or through the purchase of
an entity holding water rights, which it effected through its purchase of a membership interest of 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.
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 are no impairments on the Company’s land
and water shares. No amortization or depreciation is taken on the water rights.
GrowCo,
GCP1, GCP2 Greenhouse Construction in Progress
Construction
costs are capitalized, and not amortized or depreciated until the construction is completed in accordance with ASC 360 and 835.
The Company has completed the construction of its first greenhouse (90,000 square feet plus a 1,000 square feet boiler/mechanical
room) and related warehouse facilities (15,000 square feet).
Construction
costs are as follows:
|
|
Nine
Months Ended
September
30, 2017
|
|
|
Year
Ended
December
31, 2016
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
3,520,000
|
|
|
$
|
4,684,000
|
|
Additions
|
|
|
506,000
|
|
|
|
2,495,000
|
|
Finished
- Transferred
|
|
|
(58,000
|
)
|
|
|
(3,659,000
|
)
|
Ending
Balance
|
|
$
|
3,968,000
|
|
|
$
|
3,520,000
|
|
The
Company estimates an additional expenditure of $3.5 million is required for the completion of the GCP2 greenhouse and warehouse.
NOTE
4 – NOTES PAYABLE
Below
is a summary of the Company’s consolidated long term debt:
|
|
September
30, 2017
|
|
|
Dec.
31, 2016
|
|
|
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Principal
Balance
|
|
|
Interest
Rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,382,000
|
|
|
$
|
330,000
|
|
|
$
|
6,645,000
|
|
|
|
6
|
%
|
|
Shares
in the Mutual Ditch Company
|
CWCB
|
|
|
748,000
|
|
|
|
10,000
|
|
|
|
798,000
|
|
|
|
2.5
|
%
|
|
Certain
Orlando and Farmland assets
|
FirstOak
Bank - Dionisio Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
771,000
|
|
|
|
(1
|
)
|
|
Dionisio
farmland and 146.4 shares of Bessemer Irrigating Ditch Company Stock, well permits
|
FirstOak
Bank - Dionisio Farm
|
|
|
-
|
|
|
|
-
|
|
|
|
118,000
|
|
|
|
(2
|
)
|
|
Dionisio
farmland and 9 shares of Bessemer Irrigating Ditch Company Stock, well permits, water leases
|
Seller
Carry Back - Dionisio
|
|
|
-
|
|
|
|
-
|
|
|
|
590,000
|
|
|
|
6.0
|
%
|
|
Unsecured
|
FirstOak
Bank - Mater
|
|
|
-
|
|
|
|
-
|
|
|
|
156,000
|
|
|
|
(1
|
)
|
|
Secured
by Mater assets purchased
|
McFinney
Agri-Finance
|
|
|
443,000
|
|
|
|
-
|
|
|
|
625,000
|
|
|
|
6.8
|
%
|
|
2,579
acres of pasture land in Ellicott Colorado
|
GrowCo,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GrowCo
$4M notes
|
|
|
4,000,000
|
|
|
|
383,000
|
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$1.5M exchange note
|
|
|
100,000
|
|
|
|
9,000
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$6M exchange notes
|
|
|
2,010,000
|
|
|
|
243,000
|
|
|
|
2,010,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$7M exchange notes
|
|
|
2,977,000
|
|
|
|
246,000
|
|
|
|
2,677,000
|
|
|
|
10.0%-22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$2M exchange notes
|
|
|
1,520,000
|
|
|
|
73,000
|
|
|
|
-
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
Short Term Loan
|
|
|
-
|
|
|
|
-
|
|
|
$
|
25,000
|
|
|
|
22.5
|
%
|
|
Unsecured
|
Hemp
Loan
|
|
|
-
|
|
|
|
-
|
|
|
|
71,000
|
|
|
|
18.0
|
%
|
|
Unsecured
|
Two
Rivers Long Term Loan
|
|
|
275,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
18.0
|
%
|
|
Unsecured
|
Two
Rivers Short Term Loan
|
|
|
300,000
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
20.0
|
%
|
|
Unsecured
|
WaterRedev.
Convertible Note
|
|
|
200,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
12.0
|
%
|
|
Pasture
land near Colorado Springs Colorado
|
Equipment
loans
|
|
|
216,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
5
- 8
|
%
|
|
Specific
equipment
|
Total
|
|
|
19,171,000
|
|
|
$
|
1,356,000
|
|
|
|
18,886,000
|
|
|
|
|
|
|
|
Less:
Two Rivers discount
|
|
|
(136,000
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Less:
GrowCo discount
|
|
|
(509,000
|
)
|
|
|
|
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(13,405,000
|
)
|
|
|
|
|
|
|
(12,590,000
|
)
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
5,121,000
|
|
|
|
|
|
|
$
|
5,766,000
|
|
|
|
|
|
|
|
(1)
Prime rate + 1%, but not less than 6%.
|
(2)
Prime rate + 1.5%, but not less than 6%.
|
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. As of September
30, 2017 and December 31, 2016, the total debt discount was $645,000 and $530,000, respectively.
HCIC
Carry Back Loan
For
the nine months ended September 30, 2017, the Company is in technical default on $6,382,000 of the HCIC carry back notes due to
non-payment of principle. Consequently, the entire amount of the notes have been classified as current. Management has been in
contact with the various holders about an extension to July 1, 2019. As of September 30, 2017, management has received written
commitments to extend $5,653,000 of these notes to July 1, 2019.
GrowCo
$4M Notes
The
$4.0 million of GrowCo notes are classified as current liabilities. The notes are due April 1, 2020 however, the holders have
the right to request full payment of the principal balance with a 60-day notice.
NOTE
5 –
Information on Business Segments
We
organize our business segments based on the nature of the products and services offered. We focus on the Water and Greenhouse
business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of
businesses: Greenhouse and Water. Greenhouse contains our leasing of state of the art greenhouses to cannabis growers. Water contains
our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations
may differ from those on the face of the income statement. The Farming Business has been discontinued and therefore the operating
losses and assets have been summarized.
In
the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate,
to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments,
and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating
results for each of the segments of the Company are as follows (in thousands):
|
|
Nine
Months Ended September 30, 2017
|
|
|
Nine
Months Ended September 30, 2016
|
|
|
|
Parent
(Two Rivers)
|
|
|
Farms
(DFP)
|
|
|
Greenhouse
(GrowCo., GCP1, GCP2)
|
|
|
Water
(TR Cap)
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,865
|
|
|
$
|
40
|
|
|
$
|
2,905
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25
|
|
|
$
|
40
|
|
|
$
|
65
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
Margin
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
|
40
|
|
|
|
2,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
40
|
|
|
|
65
|
|
Total
Operating Expenses
|
|
|
(571
|
)
|
|
|
-
|
|
|
|
(306
|
)
|
|
|
(667
|
)
|
|
|
(1,544
|
)
|
|
|
(582
|
)
|
|
|
-
|
|
|
|
(2,123
|
)
|
|
|
(165
|
)
|
|
|
(2,870
|
)
|
Total
Other Income (Expense)
|
|
|
(41
|
)
|
|
|
-
|
|
|
|
(1,689
|
)
|
|
|
(250
|
)
|
|
|
(1,980
|
)
|
|
|
7
|
|
|
|
-
|
|
|
|
(763
|
)
|
|
|
(459
|
)
|
|
|
(1,215
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
870
|
|
|
|
(877
|
)
|
|
|
(619
|
)
|
|
|
(575
|
)
|
|
|
-
|
|
|
|
(2,861
|
)
|
|
|
(584
|
)
|
|
|
(4,020
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from discontinued operations
|
|
|
-
|
|
|
|
(1,174
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,174
|
)
|
|
|
-
|
|
|
|
(315
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(315
|
)
|
Net
(Loss) from Operations
|
|
|
(612
|
)
|
|
|
(1,174
|
)
|
|
|
870
|
|
|
|
(877
|
)
|
|
|
(1,793
|
)
|
|
|
(575
|
)
|
|
|
(315
|
)
|
|
|
(2,861
|
)
|
|
|
(584
|
)
|
|
|
(4,335
|
)
|
Preferred
dividends
|
|
|
(1,480
|
)
|
|
|
-
|
|
|
|
(394
|
)
|
|
|
(6
|
)
|
|
|
(1,880
|
)
|
|
|
(1,443
|
)
|
|
|
-
|
|
|
|
(495
|
)
|
|
|
-
|
|
|
|
(1,938
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
|
|
(2
|
)
|
|
|
538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Net
(Loss)
|
|
$
|
(2,092
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
1,016
|
|
|
$
|
(885
|
)
|
|
$
|
(3,135
|
)
|
|
$
|
(2,108
|
)
|
|
$
|
(315
|
)
|
|
$
|
(3,356
|
)
|
|
$
|
(591
|
)
|
|
$
|
(6,280
|
)
|
Segment
Assets
|
|
$
|
907
|
|
|
$
|
-
|
|
|
$
|
12,309
|
|
|
$
|
34,265
|
|
|
$
|
47,481
|
|
|
$
|
2,075
|
|
|
$
|
8,659
|
|
|
$
|
8,763
|
|
|
$
|
32,137
|
|
|
$
|
51,634
|
|
NOTE
6 – LEGAL PROCEEDINGS
In
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
|
●
|
On
April 14, 2016, we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
|
|
●
|
The
suspension caused Suncanna to be in violation of its lease with GCP1. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna. Due to the eviction process, during the nine months ended September
30, 2016, we wrote off $743,000 in Lease Revenues – Related Party, wrote off $587,000 in advances to Suncanna, and did
not recognize any Lease Revenues – Related Party.
|
|
●
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate
the greenhouse by September 6, 2016.
|
|
●
|
On
August 31, 2016, a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC, TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition.
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and
began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016.
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this
decision.
|
|
●
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed.
|
Management
believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna
lease agreement.
The
Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders
have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County,
Colorado, and a demand by the State to breach the dam structure. (
Two Rivers Water and Farming Co. vs. Welton Land and Water
Co
., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought certain water rights demands by the neighboring
water rights holders deemed wasteful. In the quarter ending June 30, 2016, the Company entered into a stipulation agreement with
the State, settling the State’s claims, whereby the Company agreed to take the existing dam structure down to the sediment
level. This is anticipated to begin in 2018. The Company also intends to work with the Colorado State Engineer to construct a
new dam close to the prior dam structure, pending financing. The remainder of the litigation between the Company and the neighboring
water rights holders awaits a trial setting.
On
August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey
Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services
rendered to the former board members at their behest while members of the board. At present, there are ongoing motions filed by
both parties that have not been ruled upon by the court. The $139,000 is included in our accounts payable on the balance sheet.
On
October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft.
At present, no response has been filed.
NOTE
7 – IMMATERIAL ERROR CORRECTIONS
This
Quarterly Report on Form 10-Q of the Company for the nine months ended September 30, 2017, includes the restatement of the Company’s
previously filed consolidated balance sheets for the fiscal year ended December 31, 2016.
The
Company’s management has concluded that in the Assets section of the Balance Sheet, Long Term Assets for Land and Water,
and under Liabilities the Liabilities for Discontinued Operations and Notes Payable, net of current portion were misstated and
that for comparative purposes in 2017 filings these figures should be re-stated but that the adjustments are not material modifications.
Accordingly, the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial
with respect to the prior year financial statements. Furthermore, the Company has determined that correcting prior year financial
statements for immaterial changes would not require previously filed reports to be amended.
Under
Long Term Assets, while the Assets of Discontinued Operations Held for Sale as well as Total Assets were stated correctly, due
to a mis-classification of which assets were being held for sale, Land was understated by $952,000 and Water was overstated by
the same amount. Discontinued Operations - Notes Payable was overstated by $798,000, while Notes Payable, net of current portion
was understated by the same amount due to a loan that was improperly classified as a Liability of Discontinued Operations Held
for Sale. While total assets of discontinued operations held for sale was correctly stated, under Long Term Assets, Land was understated
by $952,000 and Water Assets was overstated by the same amount. Neither Net Income or Shareholders Equity were affected by these
mis-statements. The effect of these restatements on the Company’s 2016 full year balance sheet as reported on the Form 10-K
reports, are as follows:
|
|
December
31, 2016
Previously Reported
|
|
|
Net
Change
|
|
|
December
31, 2016
(Restated)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,851
|
|
|
$
|
952
|
|
|
$
|
3,803
|
|
Water
assets
|
|
|
32,135
|
|
|
|
(952
|
)
|
|
|
31,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations held for sale
|
|
|
3,639
|
|
|
|
(798
|
)
|
|
|
2,841
|
|
Notes
Payable, net of current portion
|
|
|
4,758
|
|
|
|
798
|
|
|
|
5,556
|
|
NOTE
8 – DISCONTINUED OPERATIONS
(b)
During the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We
decided to sell all assets associated with this business due to the sustained losses incurred.
The
assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued
operations held for sale” and Liabilities of discontinued operations held for sale,” respectively, in the accompanying
Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 consist of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
(as re-stated)
|
|
Assets
of discontinued operations held for sale:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Accounts
receivable
|
|
|
-
|
|
|
|
37,000
|
|
Deposits
and other current assets
|
|
|
-
|
|
|
|
57,000
|
|
Land
and equipment
|
|
|
-
|
|
|
|
2,685,000
|
|
Total
assets
|
|
$
|
-
|
|
|
$
|
2,785,000
|
|
Liabilities
of discontinued operations held for sale:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
222,000
|
|
|
$
|
777,000
|
|
Accrued
liabilities
|
|
|
-
|
|
|
|
42,000
|
|
Notes
payable
|
|
|
98,000
|
|
|
|
2,022,000
|
|
Total
Liabilities
|
|
$
|
320,000
|
|
|
$
|
2,841,000
|
|
The
income from discontinued operations presented in the statements of operations consist of the following for the nine months ended
September 30, 2017 and September 30, 2016:
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
2,409,000
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
2,047,000
|
|
General
and administrative expenses
|
|
|
508,000
|
|
|
|
185,000
|
|
Depreciation
and amortization
|
|
|
1,000
|
|
|
|
390,000
|
|
Interest
|
|
|
41,000
|
|
|
|
103,000
|
|
Other
(loss on disposal of assets and intangibles
|
|
|
624,000
|
|
|
|
-
|
|
Total
|
|
$
|
(1,174,000
|
)
|
|
$
|
(316,000
|
)
|
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 of $1,611,000. Proceeds were used to pay off secured debt first with the residual
proceeds used to pay unsecured debt.
NOTE
9 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $10,700,000
and $6,157,000 during the years ended December 31, 2016 and 2015, respectively. At September 30, 2017, the Company has a working
capital deficit and a stockholders’ deficit of approximately $19,370,000 and $87,393,000, respectively. The HCIC seller
carry back debt is 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. These consolidated
financial statements do not include any adjustments that might arise for this uncertainty. The following paragraphs describe management’s
plans to mitigate.
The
$4M GrowCo Note is classified as current due to the holders’ right to call the note upon 60-days notice. The HCIC debt of
$6.4 million is secured by water and land assets that are valued at approximately $26 million. Should the holders of the HCIC
debt demand payment, management believes the value of these assets makes the debt re-financeable.
Since
December 31, 2016 to November 7, 2017 the Company has collected $1,820,000 under its GrowCo Exchange Note offerings. On May 2,
2017, the company received the proceeds from an unsecured bridge loan totaling $279,000. Beginning the third quarter of 2017,
GrowCo began receiving rent payments on the first greenhouse. The first use of these funds will be to pay GCP1 accounts payable.
On August 4, 2017, the Company received the proceeds from a secured loan totaling $275,000.
Additionally,
we have substantially reduced by general and administrative and cash required for our operations as we have sold our irrigating
farming business and reduced staff.
Management
Plans
The
Company is implementing a new strategy focusing on its water assets along with associated capital raises. On March 13, 2017, we
raised $257,000 as the first round of preferred funding for our new Water Redevelopment Company. Another $200,000 was raised in
a second round of preferred investment in Water Redevelopment. On August 4, 2017, the Company raised $275,000 in secured debt
from CEO Wayne Harding and two other private investors. On September 14, 2017, the Company signed definitive documents with a
private investor whereby up to $5 million in capital can be raised from an Equity Purchase Agreement (EPA) whereby the company
will sell up to $250,000 per tranche of registered shares into the public market for a total of $5 million over three years. On
October 4, 2017, the Company filed Form S1 with the Securities and Exchange Commission (SEC) for the establishment of the EPA.
On August 17
th
, 2017, the Company signed a term sheet with an investment banking firm regarding the issuance of a private
placement for our Water Redev subsidiary which is anticipated to raise $5,000,000 in the fourth quarter of 2017. In 2018, the
Company plans to follow that offering with a Regulation A Plus offering which combined is expected to raise an additional $5,000,000.
We
believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical
operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However,
we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional
financing, or whether such actions would generate the expected liquidity as currently planned.
NOTE
10 – RELATED PARTY
During
the Nine Months Ended September 30, 2017 the following related party transactions occurred:
|
●
|
Wayne
Harding, Company CEO provided a short term loan to the Company of $25,000. The loan is secured by land assets of the Company
and carried an interest rate of 12%. The loan was paid off in the third quarter of 2017.
|
|
●
|
Advances
totaling $34,400 resulting in a cumulative total of $72,999 for greenhouse expenses to Johnny Cannaseed, LLC which is majority
owned by former Company CEO John McKowen.
|
|
●
|
Revenue
totaling $2.9M has been recorded for leasing income from Johnny Cannaseed for the nine months ending 9/30/17
|
|
●
|
Accounts
Receivable (AR) due from Johnny Cannaseed for the quarter ending 9/30/17 was $1.1M, with total outstanding AR $2.8M.
|
|
●
|
Advances
totaling $26,957 resulting in a cumulative total of $43,798 for greenhouse expense to McGrow, LLC which is partially owned
by former Company CEO John McKowen.
|
|
●
|
Payments
totaling $335,531 to MCG Services, LLC which is majority owned by former Company CEO John McKowen for costs associated with
a services agreement with GrowCo.
|
|
●
|
Advances
to MCG Services, LLC total $13,295
|
|
●
|
Payments
totaling $11,210 to John McKowen for interest expense on a loan held by Mr. McKowen to GrowCo.
|
|
●
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have invested approximately $11.0M in GrowCo
securities.
|
|
●
|
The
Chief Executive Officer of Two Rivers serve as the only members of the Sunset Metropolitan District (Sunset). Sunset is a
quasi-governmental agency operating under Title 32 of the State of Colorado Constitution. As of September 30, 2017, the Company
had advanced $80,000 to Sunset.
|
|
●
|
On
June 29, 2017, a mediation session was held in Colorado Springs between all parties involved with the Suncanna lawsuit along
with each party’s legal counsel. To date, no settlement has been proposed.
|
|
●
|
The
Company leases its former corporate headquarters office space to Johnny Cannaseed. Total lease payments are $47,000 per year.
|
|
●
|
Wayne
Harding, Company CEO provided a long-term loan to the Company of $50,000. The loan is secured by land assets of the Company
and carries an interest rate of 18%.
|
NOTE
11 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
September
30, 2017
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
On
October 4, 2017, the Company filed a Form S1 with the Securities and Exchange Commission (SEC) for the purposes of establishing
an Equity Purchase Agreement (EPA) that will provide up to $100,000 per month and a total of $5,000,000 over three years in
capital to the Company by selling new registered shares of the Company stock into the public market. The Company has received
comments from the SEC and is in the process of responding to them.
|
|
●
|
On
October 4, 2017, the Company entered into a consulting agreement with Consulting for Strategic Growth 1, Ltd. The services
provided by the consultant shall include but not be limited to: general advisory services relating to the Company operating
as a publicly traded enterprise, strategic planning, introduction to investment banking firms, introduction to institutional
investing resources, introduction to retail investing resources, general evaluation of financing proposals, evaluation of
communications to the financial community and any other services that both parties agree to in connection with the agreement.
|
|
●
|
On
October 17 and 18 2017, depositions were taken from Mr. Harding and others associated with the Company for the Suncanna lawsuit.
|
|
●
|
On
October 18, 2017, the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft.
At present, no response has been filed.
|
|
●
|
On
October 23, 2017, John McKowen was elected to the GrowCo board.
|
|
●
|
On
October 31, 2017, John McKowen was elected CEO of GrowCo.
|
|
●
|
Due
to the addition of John McKowen to the GrowCo board and election as CEO, the Company has determined that this is a material
event that will require an examination of the Variable Interest Entity accounting rules and determine in the fourth quarter
of 2017 if it should continue to fully consolidate GrowCo.
|
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following table sets forth the various expenses to be incurred in connection with the sale and distribution of the securities
being registered hereby, all of which will be borne by us (except any underwriting discounts and commissions and expenses incurred
by the selling shareholder for brokerage, accounting, tax or legal services or any other expenses incurred by the selling shareholder
in disposing of the shares). All amounts shown are estimates except the SEC registration fee.
|
|
Amount
|
|
SEC
registration fee
|
|
$
|
●
|
|
Accounting
fees and expenses
|
|
|
1,800
|
|
Legal
fees and expenses
|
|
|
25,000
|
|
Miscellaneous
fees and expenses
|
|
|
●
|
|
Total
expenses
|
|
$
|
●
|
|
[TO
BE UPDATED]
Item
14. Indemnification of Directors and Officers.
Section
7-109-101 et seq. of the Colorado Business Corporation Act, or CBCA, empowers a Colorado corporation to indemnify its directors,
officers, employees and agents under certain circumstances and subject to certain exceptions.
A
corporation must indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to
which the person was a party because the person is or was a director, officer, employee, fiduciary or agent, against reasonable
expenses incurred by him or her in connection with the proceeding.
A
corporation may indemnify a person made a party to a proceeding because the person is or was a director, officer, employee, fiduciary
or agent if the person conducted himself or herself in good faith and the person reasonably believed that his or her conduct was
in or not opposed to the best interests of the corporation (or in the case of a criminal proceeding, had no reasonable cause to
believe that his or her conduct was not unlawful), except that no indemnification is allowed in connection with a proceeding by
or in the right of the corporation in which the person seeking indemnification was adjudged to be liable to the corporation or
in connection with any other proceeding in which the person was adjudged liable on the basis that he or she derived an improper
personal benefit.
Our
restated articles of incorporation provide that we shall indemnify our directors, officers, employees, fiduciaries, and agents
to the full extent permitted by Colorado law. Our restated articles of incorporation also provide that the indemnification provided
by this article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing,
both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, officer, employee, fiduciary or agent and shall inure to the benefit of heirs,
executors, and administrators of such a person.
We
have entered into indemnification agreements with our directors and executive officers. In general, these agreements provide that
we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity
as a director or officer of our company or in connection with their service at our request for another corporation or entity.
The indemnification agreements also provide for procedures that will apply in the event that a director or executive officer makes
a claim for indemnification and establish certain presumptions that are favorable to the director or executive officer.
Section
7-108-402 of the CBCA provides for elimination of personal liability of directors of a Colorado corporation for monetary damages
for breach of fiduciary duty as a director if so provided in the corporation’s articles of incorporation, except that any
such provision shall not eliminate or limit the liability of a director to the corporation or to its shareholders for monetary
damages for any breach of the director’s duty of loyalty to the corporation or to its shareholders, acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of law, acts specified in Section 7-108-403 of the
CBCA (relating to unlawful payment of dividend or unlawful stock purchase or redemption), or any transaction from which the director
directly or indirectly derived an improper personal benefit. Our restated articles of incorporation provide that, to the fullest
extent provided in the CBCA, our officers, directors, fiduciaries, and agents shall not be liable to us or our shareholders for
monetary damages.
Section
7-109-108 of the CBCA provides that a corporation may purchase and maintain insurance on behalf of a person who is or was a director,
officer, employee, fiduciary, or agent of the corporation, or who, while a director, officer, employee, fiduciary, or agent of
the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary,
or agent of another domestic or foreign entity or of an employee benefit plan, against liability asserted against or incurred
by the person in that capacity or arising from the person’s status as a director, officer, employee, fiduciary, or agent,
whether or not the corporation would have power to indemnify the person against the same liability under the provisions of the
CBCA. Our restated articles of incorporation contain a similar provision. We maintain a general liability insurance policy that
covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities
as directors or officers.
Insofar
as the foregoing provisions permit indemnification of directors, executive officers, or persons controlling us for liability arising
under the Securities Act of 1933, as amended, or the Securities Act, we have been informed that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Item
15. Recent Sales of Unregistered Securities.
Set
forth below is information regarding shares of the common stock, and warrants, and other securities convertible into, or exchangeable
or exercisable for, common stock, by us within the past three years that were not registered under the Securities Act. Included
is the consideration, if any, we received for such shares and information relating to the section of the Securities Act, or rule
of the SEC, under which exemption from registration was claimed:
|
(1)
|
between
June 2015 and July 2017 we issued a total of 295,376 shares of common stock upon conversions of preferred membership units
of TR Capital Partners LLC;
|
|
|
|
|
(2)
|
between
August 2016 and January 2017 we issued a total of 1,104,901 shares of common stock in return for cancellation of debt obligations
in the aggregate amount of $352,236.93; and
|
|
|
|
|
(3)
|
between
December 2016 and July 2017 we issued a total of 1,773,834 shares of common stock upon exercises of warrants for consideration
aggregating $675,460.56.
|
|
|
|
|
(4)
|
between
August 2017 and December 2017 we issued a total of 287,750 shares of common stock in return for cancellation of debt obligations
in the aggregate amount of $76,886.80
|
The
sales of unregistered securities described in paragraph (1) were deemed to be exempt from registration under the Securities Act
in reliance on Section 3(a)(9). The sales of unregistered securities described in paragraphs (2) and (3) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) and Regulation D.
Item
16. Exhibits and Financial Statement Schedules.
(a)
Exhibits.
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
25, 2013
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
By-laws
of Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
25, 2016
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Two
Rivers Water & Farming amended articles for 200,000,000 shares authorized
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
certificate evidencing common stock
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Form
of 12.5% original issue discount convertible promissory note issued to Powderhorn,
LLC
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1
|
|
Opinion
of Faegre Baker Daniels LLP
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Agreement
and Plan of Merger dated as of September 14, 2010 among Two Rivers Water & Farming Company, TRWC, Inc. and Two Rivers
Basin, LLC
|
|
|
|
8-K
|
|
September
22, 2010
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Form
of Promissory Note of Two Rivers Water & Farming Company
|
|
|
|
8-K
|
|
April
3, 2012
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to Purchase Agreement regarding Orlando Reservoir No. 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3a
|
|
Purchase
Agreement dated as of September 22, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.2
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.3b
|
|
First Amendment dated as of October 14, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.3c
|
|
Second Amendment dated as of November 17, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
10.3d
|
|
Third Amendment dated as of November 19, 2010 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
10.3e
|
|
Fourth Amendment dated as of January 28, 2011 between The Orlando Reservoir No. 2 Company, LLC and TRWC, Inc.
|
|
|
|
10-K/A
|
|
August
29, 2012
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to acquisition of Orlando Membership Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4a
|
|
Second Amendment dated as of September 7, 2011 among Orlando Reservoir No. 2 Company, LLC, Family Ranch Holdings, LLC, Two Rivers Water & Farming Company, TRWC, Inc., TRW Orlando Water Assets, LLC and Two Rivers Farms F-2, LLC
|
|
|
|
8-K
|
|
September
12, 2011
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
10.4b
|
|
Promissory Note dated as of September 7, 2011 of Orlando Reservoir No. 2 Company, LLC and TRW Orlando Water Assets, LLC issued to Family Ranch Holdings, LLC
|
|
|
|
8-K
|
|
September
12, 2011
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Purchase and Supply Agreement dated as of September 21, 2011 between Aurora Organic Farms, Inc. and Two Rivers Water & Farming Company
|
|
|
|
8-K
|
|
September
22, 2011
|
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to acquisition of assets of Dionisio Produce & Farms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.6a
|
|
Master Agreement dated as of April 12, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Russell L. Dionisio, Two Rivers Farms, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.2
|
|
|
|
|
|
|
|
|
|
|
|
10.6b
|
|
First Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Two Rivers Farms, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.3
|
|
|
|
|
|
|
|
|
|
|
|
10.6c
|
|
Second Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
10.6d
|
|
Third Amendment dated as of April 12, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
10.6e
|
|
Second Closing dated as of November 2, 2012 to Master Agreement among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, Russell L. Dionisio, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.6
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.6f
|
|
Assignment of Trademark dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC and TR Bessemer, LLC
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.7
|
|
|
|
|
|
|
|
|
|
|
|
10.6g
|
|
Bill of Sale dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.8
|
|
|
|
|
|
|
|
|
|
|
|
10.6h
|
|
Promissory Note dated as of November 2, 2012 of RR Bessemer, LLC issued to R&S Dionisio Real Estate and Equipment
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.9
|
|
|
|
|
|
|
|
|
|
|
|
10.6i
|
|
Assignment of Produce Contracts among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.10
|
|
|
|
|
|
|
|
|
|
|
|
10.6j
|
|
Lease Agreement dated as of November 2, 2012 among R&S Dionisio Real Estate and Equipment, LLC, Dionisio Produce & Farms, LLC, TR Bessemer, LLC and TRWC, Inc.
|
|
|
|
8-K
|
|
June
16, 2012
|
|
99.12
|
10.7
|
|
Series A Convertible Preferred Stock Purchase Agreement dated as of November 25, 2012 among Dionisio Farms & Produce, Inc., TRWC, Inc. and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Farms F-1, LLC, Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Commercial Lease Agreement dated as of August 29, 2014 between GrowCo, Inc. and Cool House Farms, LLC
|
|
|
|
8-K
|
|
September
4, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Conversion Agreement effective as of December 31, 2012 among Two Rivers Farms F-2, LLC, Two Rivers Water & Farming Company and Investors
|
|
|
|
10-K
|
|
March
25, 2013
|
|
4.7
|
|
|
|
|
|
|
Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Commercial Lease Agreement dated as of August 29, 2014 between GrowCo, Inc. and Mojo MJ, LLC
|
|
|
|
8-K
|
|
September
4, 2017
|
|
10.1
|
10.13
|
|
Real
Estate Purchase Agreement dated as of September 16, 2014 between Two Rivers Water &
Farming Company and Farmland Partners Inc.
|
|
|
|
8-K
|
|
September
18, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to Financing of TR Capital Partners, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14a
|
|
Limited Liability Company Agreement dated as of January 31, 2014 among TR Capital Partners, LLC and the Members named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.14b
|
|
Membership Interest Purchase Agreement dated as of January 31, 2014 among TR Capital Partners, LLC and the Investors named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
10.14c
|
|
Exchange Agreement dated as of January 31, 2014 among TR Capital Partners, LLC, Two Rivers Water & Farming Company and the Holders named therein
|
|
|
|
8-K
|
|
May
14, 2014
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating
to 2005 Stock Option Plan:
|
|
|
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†
10.16
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2005 Stock Option Plan
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|
|
|
10-K
|
|
March
25, 2016
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10.16
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Relating
to 2011 Long-Term Stock Plan:
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†
10.17a
|
|
2011
Long-Term Stock Plan
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.17
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|
|
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|
|
|
|
|
|
†
10.17b
|
|
Form of Restricted Stock Unit Award Agreement for Employees
|
|
|
|
10-K
|
|
March
25, 2016
|
|
10.17
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†
10.17c
|
|
Form of Restricted Stock Unit Award Agreement for Non-Employees
|
|
|
|
10-K
|
|
March
25, 2016
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10.17
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|
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|
|
|
|
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|
†
10.19
|
|
Employment
Agreement dated as of January 1, 2011 between John R. McKowen and Two Rivers Water & Farming Company
|
|
|
|
10-K
|
|
March
30, 2011
|
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10.1
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Incorporated
by Reference
|
Exhibit
Number
|
|
Description
of Exhibit
|
|
Filed
Herewith
|
|
Form
|
|
Filing
Date with SEC
|
|
Exhibit
Number
|
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(b)
Financial Statement Schedules.
No
financial statement schedules are provided because the information called for is not required or is shown either in the financial
statements or notes incorporated by reference herein.
Item
17. Undertakings.
|
(a)
|
The
undersigned Registrant hereby undertakes:
|
|
(1)
|
To
file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
|
|
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|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
|
|
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(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities
offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective
Registration Statement; and
|
|
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration Statement;
|
provided,
however,
that paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are incorporated
by reference in this Registration Statement.
(2)
That, for the purposes of determining any liability under the Securities Act, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b)
The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the
Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of
an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(c)
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
SIGNATURE
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of Aurora, State of Colorado, as of February
9, 2018.
|
TWO
RIVERS WATER & FARMING COMPANY
|
|
|
|
|
By:
|
/s/
Wayne Harding
|
|
|
Wayne
Harding
|
|
|
Chief
Executive Officer and Acting Chief Financial Officer
|
SIGNATURES
AND POWER OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Wayne Harding and
Bill Gregorak, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution, for
him in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments
or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities
for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute,
may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities
and as of February 9, 2018.
Signature
|
|
Title
|
|
|
|
/s/
Wayne Harding
|
|
Chief
Executive Officer, Chief Financial Officer and Chairman of the Board
|
Wayne
Harding
|
|
(Principal
Executive, Financial and Accounting Officer)
|
|
|
|
/s/
Samuel Morris
|
|
Director
|
Samuel
Morris
|
|
|
|
|
|
/s/
Michael Harnish
|
|
Director
|
Michael
Harnish
|
|
|
|
|
|
/s/
T. Keith Wiggins
|
|
Director
|
T.
Keith Wiggins
|
|
|
|
|
|
/s/
Christopher Bragg
|
|
Director
|
Christopher
Bragg
|
|
|
|
|
|
/s/
James D. Cochran
|
|
Director
|
James
D. Cochran
|
|
|
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