UNIted States
SeCURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2018 |
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission file number: 000-51139
Two Rivers Water & Farming Company
(Exact Name of Registrant as Specified in Its Charter)
| Colorado | 13-4228144 | |
| (State
or Other Jurisdiction or Incorporation or Organization) |
(I.R.S.
Employee Identification No.) |
3025 S Parker Rd, Suite 140 Aurora, Colorado |
80014 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 222-1000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2018, the aggregate market value of common stock held by non-affiliates of the registrant was $4,449,000, based on a total of 32,955,103 shares held by non-affiliates and on a closing price of $0.295 per share.
There were 50,350,180 shares of common stock outstanding as of April 5, 2019.
TABLE OF CONTENTS
Company References. When we use “the Company,” “our company,” “we,” “our,” “us” and similar terms in this report, we mean Two Rivers Water & Farming Company and its subsidiaries. The term “Two Rivers” refers solely to Two Rivers Water & Farming Company and does not include subsidiaries.
Forward-Looking Statements. This report, particularly the description of our business set forth in Item 1 and the discussion and analysis of our financial condition and operating results in Item 7, contains a number of “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Any statements contained in this report that are not statements of historical fact should be considered to be forward-looking statements. You can identify these forward-looking statements by use of the words “believes,” “expects,” anticipates,” plans,” “may,” “will,” “would,” “intends,” “estimates” and other similar expressions. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our company and the industries and markets in which we operate and on management’s beliefs and assumptions, and they should be read in conjunction with the information presented elsewhere in this report, including the discussion and analysis in Item 2 and the consolidated financial statements and notes provided pursuant to Item 7. Although we believe our forward-looking statements are based on reasonable beliefs and assumptions, we cannot guarantee our future performance and a number of important risks and uncertainties could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Those risks and uncertainties include the factors summarized in Item 1A as well as risks that emerge from time to time and are impossible for us to predict. Forward-looking statements, like all of the statements in this report, speak only as of the date of filing of this report with the SEC, unless another date is indicated. We disclaim any obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
| i |
| ITEM 1. | BUSINESS |
Overview
“As water becomes ever more scant the world needs to conserve it, use it more efficiently and establish clear rights over who owns the stuff.” – Liquidity Crisis, The Economist, Nov 5, 2016
Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. In October 2016 we began to focus on monetizing our assets by investing strategically in assets that we believe offer opportunities for significant future returns for our shareholders and by selling those assets we determine will not yield those returns. As the result of that process, the management of water has become our core business. Our water asset total drainage area spans over 1,500 square miles and drops in elevation from over 14,000 feet to 4,500 feet at the confluence of the Arkansas River just east of Pueblo, Colorado. We operate in a natural, gravity fed water alluvial, which is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors. Our water development operations and strategy are described below under “Our Water Operations.”
Beginning in February 2018, we opened discussions with a group of hemp related companies. Two Rivers desired to find a source of capital along with the ability to generate near-term revenue from the land and water assets owned by Two Rivers. Presently, Two Rivers has entered into a stock exchange agreement for the purchase of 100% of the three entities: Vaxa Global, LLC (“Vaxa”); Ekstrak Labs, LLC (“Ekstrak”), and Gramz Holdings, LLC (“Gramz”). Vaxa grows CBD hemp focused plants. Ekstrak extracts CBD oil. Gramz produces and sells CBD extract in the form of both isolate and full-spectrum oil within end-user products.
Our principal investments since commencing operations in 2009, and the status of those investments following the implementation of our monetization strategy in 2016, are described below:
| ● | HCIC: From 2009 to 2010 we purchased 95% of the outstanding shares of Huerfano-Cucharas Irrigation Company, or HCIC, in a series of transactions for $24.2 million in cash, promissory notes and Two Rivers’ common stock. HCIC is a mutual ditch company formed in 1944, and we have used its water rights and facilities to supply some of our farmland with irrigation water. In the future, we will use these water rights to supply water to farmland we lease to others and to implement our new water strategy. |
| ● | Additional Farmland: From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s ditch system for purchase prices totaling $1.4 million in cash and seller carry back financing. In 2012 we acquired 1,584 acres in Butte Valley for $509,000 in cash and seller carry back financing. In 2016, we returned 187 acres around the Orlando land back to the holder of seller carry back financing in exchange for forgiveness on $187,000 of debt and associated accrued interest. |
| ● | Orlando: In 2011 we acquired Orlando Reservoir No. 2 Company, LLC, or Orlando, for $3.45 million in cash, promissory notes and common stock. Our ownership of Orlando increases the reliability of water supplies for our farmland in the Huerfano and Pueblo river basins. We undertook a program to refurbish and restore Orlando’s diversion structure, storage reservoirs and conveyance system. During the period from November 2011 to February 2012, we constructed new outlet works, and in 2012 we reconstructed the diversion structure, which takes water from the Huerfano River for storage in the Orlando reservoir and then conveyance to irrigate our nearby leased farmland. Additional renovation projects will be completed as necessary to provide reliable water supplies for farmland we lease to others and community use. |
| ● | DFP (discontinued operations): In 2012 we acquired Dionisio Farms & Produce, Inc., or DFP, for $3.4 million in cash and promissory notes. DFP, which has operated for more than 60 years, produces high-value fruits and vegetables as well as fodder crops. Through this acquisition, we obtained 146 acres of irrigable farmland, 146 shares of the Bessemer Ditch Irrigation Company, a senior water right holder on the main stem of the Arkansas River and 2 supplemental ground water wells. As part of the acquisition, we entered into leases for an additional 279 irrigable acres. In late 2016, based on three years of operational losses, we decided to sell DFP assets and wind down our produce growing and distribution business within Pueblo County. During the first quarter of 2017 we sold the DFP irrigated farmland and the associated DFP produce business that no longer served our strategic vision of water management |
| Two Rivers Water & Farming Company | 2018 Financials | Page 1 |
| ● | GrowCo (no longer consolidated effective April 1, 2018): We formed GrowCo, Inc., or GrowCo, in May 2014 for the purpose of constructing state-of-the-art computer-controlled greenhouses to be leased to licensed marijuana growers throughout the United States. GrowCo is not a licensed marijuana grower or retailer. GrowCo does not “touch the plant” and only provides growing infrastructure as a landlord for licensed marijuana grower tenants along with support and administrative services. In August 2014 we announced we were reserving 10 million of the GrowCo shares for distribution to holders of common stock as of four record dates (January 1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after a registration statement for GrowCo common shares has been filed and declared effective, which has not yet occurred. Currently, GrowCo has approximately 35 million common shares outstanding. As of April 1, 2018, due to change of management and control, the Company no longer consolidates GrowCo. |
| ● | Water Redevelopment: We formed Water Redevelopment Company, or Water Redev, in February 2017 to separate our water assets from the rest of our business and to enable additional raising of capital solely for the purpose of investing in our water assets. Water Redev is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management and delivery, as further described in “Our Water Operations” below. |
Our Water Operations
Colorado allocates water based on the Prior Appropriation Doctrine, whereby water rights are unconnected to land ownership. The first person to use a quantity of water from a water source for a beneficial use has the right to continue to use that quantity of water for that purpose. Subsequent users can use the remaining water for their own beneficial purposes provided that they do not impinge on the rights of previous users. Water rights can be developed, managed, purchased and sold much like real property, and the seniority of water rights are a significant consideration when we acquire additional irrigated farmland. Water rights include the ability to divert stream flow, build a storage reservoir, pump ground water and create augmentation water supplies to offset depletions of water taken out of priority.
Since 2009 we have acquired a portfolio of water rights in the Arkansas River Basin in connection with our purchases of irrigated farmland. With our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate from use in irrigating our farmland, that could benefit our stakeholders, including our shareholders and the communities near where our water assets are located.
As a result of that investigation, we made water management our top priority. We believe there are several opportunities to capitalize on water assets that we currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following within the local communities we serve:
| ● | We will seek to address the need for municipal water storage. | |
| ● | We believe there are a variety of opportunities to lease, both short term and long term, our water assets. | |
| ● | We have identified underutilized land that, along with the water we own, can be leased for agriculture activities. | |
| ● | We plan to execute on a water supply agreement we entered into in January 2011, with a real estate development company in Huerfano County by beginning to supply raw water for water taps. |
Our principal water rights include the following:
| ● | As noted in “Overview” above, we acquired control of HCIC in order to use its water rights and facilities to supply some of our farmland with irrigation water. The HCIC farmland became fallow in the mid-twentieth century when coal mines in Huerfano County, Colorado, were shut down. The coal mines had continuously pumped water from the Vermejo/Trinidad Formation, which contained a renewable underground aquifer that is fed by Sangre de Cristo Mountains snowmelt. The U.S. Geological Service estimates that the Raton Vermejo Basin, where we have water rights, contains an estimated 12 trillion gallons or 36 million acre-feet of relatively untapped, clean and renewable water. HCIC owns the Cucharas and Huerfano Valley Reservoirs and two ditch systems located in Pueblo County, Colorado. The HCIC ditch systems have the right to distribute water over approximately 30,000 acres in Pueblo County, Colorado. |
| Two Rivers Water & Farming Company | 2018 Financials | Page 2 |
| ● | The Orlando water rights include the senior-most direct flow water right on the Huerfano River, or #1 priority, along with the #9 priority and miscellaneous junior water rights. The seniority of those water rights allowed the production of crops during most of the recent drought years. The Orlando assets also include the Orlando reservoir, which is situated on the Huerfano branch of the Huerfano River and has a storage capacity of 3,100 acre-feet. |
An acre-foot, or A.F., of water is the amount of water required to cover one acre to a depth of one foot. An acre-foot of water contains 325,851 gallons, generally considered enough water to supply two average households for a year. Annual irrigation in Southeastern Colorado, depending on the crops, consumes approximately three to six acre-feet of water per acre of crop.
By capturing water in reservoirs and releasing it later for irrigation purposes, we are able to retime the delivery of water throughout the irrigation season and ameliorate some of the inconsistencies of seasonal and annual water availability for the farmland we manage.
Surface Water Rights
Tributary ground water is any underground water that is hydraulically connected to a stream system and that influences the rate or direction of flow in that stream system. Any new ground water diversions that are tributary to an over-appropriated stream system require augmentation to offset out-of-priority depletions. In 2013, many well water users on the Arkansas River and its tributaries were unable to use their wells, as drought conditions made augmentation water unavailable. In response, an augmentation provider requested that we assist in building a more efficient and plentiful augmentation supply. We had intended to assist with an augmentation supply, but due to capital requirements, we terminated those plans.
We own the following surface water rights:
| Structure | Elevation | Priority No. | Appropriation Date | Consumptive Use | Decreed Amount | |||||||||||||
| Butte Valley Ditch | 5,909 ft | 1 | 5/15/1862 | 360 A.F. | 1.2 cfs | |||||||||||||
| Butte Valley Ditch | 9 | 5/15/1865 | 1.8 cfs | |||||||||||||||
| Butte Valley Ditch | 86 | 5/15/1886 | 3.0 cfs | |||||||||||||||
| Butte Valley Ditch | 111 | 5/15/1886 | 3.0 cfs | |||||||||||||||
| Robert Rice Ditch | 5,725 ft | 19 | 3/01/1867 | 131 A.F. | 3.0 cfs | |||||||||||||
| Orlando Canal No. 3 | 5,911 ft | 10/19/1906 | ||||||||||||||||
| Huerfano Valley Ditch | 4,894 ft | 120 | 2/2/1888 | 2,891 A.F. | 42.0 cfs | |||||||||||||
| Huerfano Valley Ditch | 342 | 5/1/1905 | 18.0 cfs | |||||||||||||||
“Consumptive use” is the term for the portion of a water diversion right that is actually consumed by its beneficial use. Where the beneficial use is agricultural irrigation, consumptive use represents the amount of water consumed by the irrigated crop or evaporated on the farm. After deducting consumptive use from the amount of water diverted and applied to irrigation, the remainder is described as “return flow” to the system. Such return flows are generally subject to appropriation downstream. Only the consumptive use portion of a given water right is subject to transfer (that is, a change in the point of diversion, place of use, or purpose of use). Therefore, water rights are often assigned monetary value based on the consumptive use portion. Although consumptive use varies by crop, rainfall, temperature and other factors, in southeastern Colorado, crops generally consume about two acre-feet of applied water for each acre planted, depending on the crops planted. In order to provide that amount of consumptive use water, an irrigator must generally apply three acre-feet of water (allowing for predictable return flow equal to about one-third of the applied water). We measure our water rights both in terms of the amount of the diversion or storage right, as the case may be, but also in terms of the historic consumptive use.
| Two Rivers Water & Farming Company | 2018 Financials | Page 3 |
Storage Rights and Infrastructure
The following table presents our holdings of storage water rights:
| Structure | Elevation | Priority No. | Appropriation Date | Average Annual Yield (A.F.) | Decreed Amount (A.F.) | Estimate
of Current Effective Storage (A.F.) | ||||||||||||||
| Huerfano Valley Reservoir | 4,702 ft | 6 | 2/2/1888 | 1,424 | 2,017 | 1,000 | ||||||||||||||
| Cucharas Valley Reservoir | 5,570 ft | 66 | 3/14/1906 | 3,055 |
31,956 | Current no-fill restriction* | ||||||||||||||
| Cucharas Valley Reservoir** | 5,705 ft | 66c** | 3/14/1906 | 34,404 | ||||||||||||||||
| Orlando Reservoir # 2 | 5,911 ft | 349 | 12/14/1905 | 1,800 | 3,110 | 1,500 |
| * | See description below regarding litigation. |
| ** | This is a conditional right while the engineering and construction of structures are completed to perfect a water right, in this case to physically store the water. The conditional right establishes a seniority date but allows time for completion of the project. Conditional rights are reviewed every six years by the water court to confirm that progress is being made on the effort to perfect the right. When a conditional water right is perfected, which can be done incrementally in the case of storage, the water right becomes absolute. In addition, the Cucharas Valley Reservoir has Conditional rights to 34,404 A.F. of additional storage. |
The Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation in the Colorado Division 2 Water Court concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., Pueblo Water Court). As part of the litigation, Two Rivers sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. The Company has withdrawn this suit with prejudice, and the Welton Land and Water Co. have been awarded $204,000 in legal fees that remain unpaid, which we have recognized in accrued expenses.
In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims at that time. Under the stipulation agreement, Two Rivers agreed to take the existing dam structure down to the sediment level by March 31, 2018. Two Rivers was able to empty all the water in the Dam but was not able to meet the requirements of the agreement by March 31, 2018 due to lack of capital. On April 3, 2018, the State filed a motion for the issuance of a contempt of court citation against the Company, its then directors, and former director and CEO John McKowen, and certain other individuals for breach of the agreement seeking sanctions, imposition of a civil penalty of $100,000 and payment of legal fees. The Company and its then directors are contesting the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive. Preliminary hearings for the defendants were held on May 10 and June 8, 2018. At the May 10, 2018 hearing it was determined that the State of Colorado could proceed with its action. At the June 8 hearing, a trial date of December 17, 2018 was set by the Court that was subsequently postponed to October 2019.
The Company intends to continue its efforts to seek funding so that it can comply with the agreement. In the three months ended December 31, 2018 the Colorado State Engineer (the “State”) began to take the existing dam down. This work was completed in January 2019. The State has estimated that the deconstruction work with associated fees and penalties is approximately $1,300,000. As of December 31, 2018 we have accrued a liability and other expenses of $1,800,000 for this work including a $185,000 fine to the County of Huerfano. At this time, the Company does not have funds to pay the State or the County the amounts due each but is actively seeking the required capital.
As part of our comprehensive water system we utilize storage reservoirs and ditches. Reservoirs allow water owners to store their water and plan the water’s distribution throughout the growing season. We currently own reservoirs associated with HCIC and Orlando. The development and improvement of storage reservoirs in the area will allow us to offer storage to other water users in the area for a storage leasing fee. Through water exchanges and other water-related transactions, the reservoirs can potentially increase and strengthen our existing water rights.
| Two Rivers Water & Farming Company | 2018 Financials | Page 4 |
All of our reservoirs are used for irrigation in a similar manner to other reservoirs in the region, with the exception of Pueblo Reservoir, which was also constructed for flood control. Direct flow rights generally are senior to most storage rights but typically do not divert early in the spring when storage rights fill. The Arkansas River below Pueblo Reservoir operates a Winter Storage Program that re-allocates winter direct flow rights to storage in reservoirs from November 15 to March 15 each year.
Because our water rights and operating structures are located at succeeding elevations in the watershed, the system moves water supplies from point of diversion, through storage, to place of use primarily by means of gravity, making it more economical to operate than systems requiring energy to pump water for beneficial use.
In order to use these rights and structures most efficiently, we have planned and begun to implement a program of renovation and integration. For example, we began construction of new outlet works for the 1905 Orlando Reservoir in November 2011. The work was completed and successfully tested in February 2012, approximately a year after we acquired Orlando. Also in February 2012, we commenced reconstruction of the diversion structure, which takes water from the Huerfano River for storage in the Orlando reservoir, and to irrigate our nearby farmland. Additional water facility renovation projects are planned on a phased basis as necessary to provide reliable irrigation for agricultural operations and eventually commercial use.
We currently have the operable right to store 5,000 acre-feet of water within the Huerfano and Cucharas Rivers watershed in three separate reservoirs, subject to repair, or removal and rebuilding, limitations. When our reservoirs on the Huerfano and Cucharas Rivers have been fully restored, we will have the operable capacity and legal right to store in excess of 70,000 acre-feet of water. Similarly, based on our portfolio of water rights, we have the right to divert from the natural flows of the two rivers in excess of 90 cubic feet per second. Seasonal variability in the natural flow of the rivers, as well as the priorities of other water users in the system, limits our ability to divert the decreed amounts of water on a continuous basis. Our current water rights produce a long-term average annual diversion of 15,000 acre-feet of water.
The 15,000 acre-feet average is based on a record period of more than 50 years and also relies on historic studies of these rights by a variety of engineers at various times. It is common practice within the water industry in Colorado to use long periods of time to create reliable averages of water flow. We believe that using averages relating to only recent years can be misleading because an average could be skewed if only one of those years was particularly dry or wet. For example, in three out of the last ten years, there has been an extreme drought in our area of operations. Due to this drought condition, our flow averages for the most recent ten, five and three years are 8,200 acre-feet, 10,500 acre-feet and 10,400 acre-feet, respectfully. A similar request for the same averages for the decade beginning in 1980 would result in averages of 5,900 acre-feet, 18,500 acre-feet and 17,200 acre-feet. During 2017, which was a wet year, an estimated 50,000 acre-feet flowed through the Cucharas dam site. Normal flow through the Cucharas is approximately 22,000 acre-feet per year.
Formation of Water Redevelopment
In the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate from use in irrigating farmland, that could benefit our stakeholders, including our shareholders and the communities near where our water assets are located. On September 30, 2016, our board of directors established a board-level task force to identify opportunities for our existing water assets, and perhaps acquired water assets. As a result of that investigation, water is a new top-priority for our Company.
Based on findings from our water task force, we believe we have several opportunities to capitalize on water assets that we currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following:
| ● | We will seek to address the need for both agricultural and municipal water storage. As discussed in the 2015 Colorado Water Plan and its Executive Summary Colorado has set a goal of attaining an additional 400,000 acre feet of storage by 2050. (Board) | |
| ● | 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 lease to agricultural operators including growers of marijuana and hemp. |
| Two Rivers Water & Farming Company | 2018 Financials | Page 5 |
| ● | In January 2011, we entered into a water supply agreement to supply water resources for real estate development in Huerfano County, Colorado. In late 2019 we intend to begin the development and legal process to begin to deliver raw water to this development. |
Agreement to Purchase Companies – Subsequent Event
On February 22, 2019, we entered into a share exchange agreement pursuant to which we agreed to acquire the 100% membership interest in Vaxa Global, LLC, or Vaxa, from Easby Land & Cattle Company, LLC, or Easby, in exchange for 30,000,000 shares of our common stock and an earn-out arrangement for up to 20,000,000 additional shares of our common stock.
Vaxa owns a 100% membership interest in each of Ekstrak Labs LLC, (“Ekstrak”), and Gramz Holdings, LLC, (“Gramz”). Vaxa has been operating since 2014. Ekstrak has been operating since 2017. Gramz has been operating since 2015.
| ● | Vaxa grows CBD hemp focused plants. | |
| ● | Ekstrak extracts CBD hemp oil. | |
| ● | Gramz produces and sells CBD extract in the form of both isolate and full-spectrum oil, compounds, such as Gramz Herbal Topical and Gramz Whole Plant Matrix Sublingual Drops, which has been developed to exploit the medicinal and therapeutic benefits of hemp. |
If the proposed acquisition is completed, we expect Vaxa will expand their operations to grow hemp on land owned, and with water supplied, by Two Rivers. This will provide additional hemp products to Ekstrak and Gramz.
We will issue to Easby a total of 30,000,000 shares of common stock at closing. In addition, we may be required to issue additional shares pursuant to an earn-out covenant in the share exchange agreement. The number of earn-out shares will equal the lesser of the quotient of (a) 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa (including Ekstrak and Gramz) for the year ending March 31, 2020 (or, if the parties agree to extend the required closing date to a date not later than July 15, 2020, the year ending June 30, 2020), divided by $1.00; and 20,000,000.
It is expected that the earn-out shares, if any, would be issued by May 2020 (or by August 2020, if the parties extend the closing date as described in the preceding sentence).
The closing must occur on or before April 15, 2019, unless otherwise agreed upon by the parties. It is anticipated that an extension will be necessary and both parties will agree to an extension. The closing is subject to standard conditions, as well as a requirement that we enter into an agreement with holders of outstanding preferred units of TR Capital Partners, LLC, or TRCP, pursuant to which all of the outstanding TRCP preferred units will be exchanged for shares of our common stock. We will seek to complete the exchange for TRCP preferred units in order to, among other things, significantly simplify our capital structure.
Our Organizational Structure
Since commencing operations as a farming and water company in 2009, we have built an organizational structure that enabled us to raise capital for specific projects completed by our direct and indirect subsidiaries.
In January 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations. We formed TR Capital Partners, LLC or TR Capital, which issued all of its common units to the Two Rivers. In a series of transactions from January to September 2014, TR Capital entered into Membership Interest Purchase Agreements pursuant to which it issued and sold a total of 30,158,815 preferred units to investors in exchange for consideration comprised of $6.0 million in cash and $18.9 million of outstanding equity and equity-related securities of our subsidiaries other than HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company.
| Two Rivers Water & Farming Company | 2018 Financials | Page 6 |
The TR Capital Partners Limited Liability Company Agreement dated as of January 31, 2014 provides that holders of preferred units generally will be entitled to receive distributions each fiscal year in an amount equal to the lesser of 12% of the preferred unit holders’ aggregate capital contributions and net income, if any, over the 8% base return TR Capital for each fiscal year. Regardless of TR Capital’s operating results, however, preferred unit holders are entitled to a minimum distribution for each full fiscal year equal to 8% of their aggregate capital contributions, payable in equal quarterly installments. If net income for a fiscal year is less than 12% of the preferred unit holders’ aggregate capital contributions, the shortfall will not be payable in any subsequent fiscal year.
Pursuant to a binding letter of intent signed with potential outside strategic partners, the accrual of the 2% of TR Capital’s preferred unit holders distribution was suspended effective for the period beginning July 1, 2018.
Pursuant to an Exchange Agreement dated as of January 31, 2014 entered into with TR Capital and Two Rivers, any holder may surrender a TR Capital preferred unit to Two Rivers at any time for consideration consisting of (a) accrued but unpaid preferred distributions on the preferred unit through the exchange date, (b) one share of common stock and (c) a warrant to purchase an additional one-half share of common stock at a price of $2.10 per share. TR Capital may require (with limited exceptions) each of its outstanding preferred units to be surrendered to Two Rivers in exchange for such consideration at any time after January 31, 2017, at which (1) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange for a closing price of at least $3.00 and (b) a registration statement filed by us with the SEC is effective with respect to the shares of common stock, including shares purchasable pursuant to warrants, issuable upon such exchanges. Each warrant issued upon any such exchange generally will be exercisable at any time on or before January 31, 2019, subject to our right to redeem the warrant at any time after January 31, 2017, at which (A) for a period of 20 trading days, at least 250,000 shares of common stock have been traded on a national securities exchange for a closing price of at least $3.00 and (B) a registration statement has been filed and is effective with respect to the shares of common stock issuable pursuant to such warrant. Under the Exchange Agreement, Two Rivers also granted holders of preferred units one-time demand registration rights under which Two Rivers may be required to file a registration statement covering shares of common stock (including shares subject to warrants) issued or issuable upon exchanges of TR Capital preferred units. As of April 4, 2019, Two Rivers could be required under Two Rivers to issue and deliver to holders of outstanding TR Capital preferred units, upon exchange, up to 26,294,200 shares of common stock together with warrants to purchase up to an additional 14,168,944 shares of common stock. If Two Rivers receives any TR Capital pursuant to exchanges under the Exchange Agreement, it would be entitled to receive distributions on those preferred units pro rata with other holders of preferred units.
In February 2019, a stock exchange agreement was signed with potential strategic partners that requires an agreement to be executed between the Company and TR Capital preferred units to exchange all preferred units into the Company’s common shares.
Following the completion of those transactions in September 2014, TR Capital and Two Rivers’ other direct and indirect subsidiaries (excluding HCIC Holdings, LLC and HCIC) entered into a series of related transactions as the result of which control and operation of those other subsidiaries and their businesses transferred to TR Capital, which is the operational division of Two Rivers.
On February 16, 2017, Two Rivers’ formed Water Redevelopment Company, a Colorado Corporation. For a more detailed description of ownership structure please refer to exhibit 21.1 filed herewith.
Corporate Information
Two Rivers’ is a Colorado corporation with principal executive offices at 3025 S Parker Rd, Suite 140, Aurora, Colorado, 80014 and our telephone number at that address is (303) 222-1000. Our website address is www.2riverswater.com. The information on our website is not part of this report.
Competition
Water
The rights to use water in Colorado have been fully appropriated to beneficial uses (such as agriculture irrigation and municipal and industrial applications) under court decrees and state regulation according to the prevailing Prior Appropriation Doctrine in which more senior (older) water rights take precedence in times of shortage over junior (newer) water rights. Notwithstanding significant conservation, growth in Colorado with related incremental demands for water has made the rights to divert, convey, store and use water relatively scarce and valuable. There is significant competition for the acquisition and beneficial use of historic water rights. Many competitors for the acquisition of such rights have significantly greater financial resources, technical expertise and managerial capabilities than we do and, consequently, we could be at a competitive disadvantage in assembling, developing and deploying water assets required to support our businesses. Competitors’ resources could overwhelm our efforts and cause adverse consequences to our operational performance. To mitigate such competitive risks, we concentrate our efforts in the Huerfano and Cucharas Rivers watershed where our local knowledge and control of a portfolio of water rights, storage facilities, distribution canals and productive farmland creates a somewhat protected geographic niche. To further mitigate competitive risk, we strive to actively engage with both the farming and municipalities in southeastern Colorado to explore strategies for cooperatively addressing challenges and opportunities faced by those communities—particularly to address the 130,000 acre-foot shortfall in water supplies on the Front Range, without taking valuable farmland out of production.
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Regulation
Water
Background
The right to water in Colorado is a right that can be developed, managed, purchased or sold much like real property subject to appropriate regulation. Water rights are judicially decreed and, under Colorado’s application of the Prior Appropriation Doctrine (“first in time, first in right”), senior water right holders are entitled to the beneficial use of water prior to junior holders. Consequently senior water rights are more consistent, reliable and valuable than junior rights, which may be interrupted, or “called out” in the parlance of Colorado water administration.
Along the Front Range of Colorado, water is a scarce and valuable resource. Natural precipitation varies widely throughout the year and from one year to another. Rivers, which fill, and sometimes flood, with the spring melt from the mountain snowpack, may be refreshed only with the occasional thunderstorm in the heat of the summer growing season. Annual precipitation also varies between surplus and drought.
Additionally, the large majority of Colorado’s population resides on the Front Range (east of the Continental Divide) while the large majority of the state’s precipitation falls on the Western Slope (west of the Divide). Over time, many communities, farms and enterprises developed trans-mountain diversions to bring more water to the Front Range. Precipitation on the Front Range, and water diverted from the Western Slope (meaning west of the Continental Divide), drain to the Mississippi River through the South Platte and Arkansas Rivers. Water on the Western Slope drains through the Colorado River. All of the state’s rivers are administered pursuant to interstate compacts with neighboring states. As a result of the variability of Colorado’s hydrology, its arrangements for diversions, storage and beneficial use, and its obligations to downstream states, Colorado has developed an integrated and complex water rights administration system.
In Colorado and the Western United States, the right to use water is based on the Prior Appropriation Doctrine, which is often referred to as “first in time, first in right.” Under this doctrine, water use is allocated to satisfy the oldest (“most senior”) water right before water is allocated to the next water right in historic chronology (a “junior water right” in comparison to a water right perfected earlier). Moreover, in Colorado, water rights and their relative priorities are protected by judicial decrees and are administered by the Office of the State Engineer, or the State Engineer, within the Colorado Department of Water Resources. The ability to consistently irrigate farmland, and thus avoid the inconsistencies of rainfall, is therefore tied to the relative seniority of historic water rights. Two Rivers is focused on developing irrigated farmland and maximizing beneficial use of the water rights associated with that farmland.
To manage water uses according to the Prior Appropriation Doctrine, Colorado maintains both judicial oversight through regional water courts and administrative oversight through the Colorado State Engineer. Water rights claims are filed in the water courts, adjudicated as necessary to resolve any adverse claims, and then decreed though an enforceable judgment. The State Engineer is charged with administering the accorded priorities among the various water rights in each of the state’s river systems.
Colorado water law further recognizes two distinct but related prior appropriative rights: direct diversion rights and storage rights. Direct diversion rights permit a user in priority to divert water directly from the river for immediate beneficial use (such as irrigation); storage rights permit a user in priority to divert water from the river and impound the water in a reservoir to re-time the water for later beneficial use. Thus, in Colorado, a direct diversion right must be conveyed to an immediate use; it cannot be stored without a storage right. As a result, both types of appropriative rights are often paired, when possible, so that in priority diversion rights can be re-timed through the exercise of a companion storage right to address seasonal and year-to-year variability in natural supplies. The older the appropriation date of any water right, the more reliable is its yield; similarly, the more effectively a senior diversion right is paired with a senior storage right, the more reliable each becomes.
Administration of Water Rights
In addition to the intra-state administration of water flowing in its rivers, Colorado also has inter-state water administration responsibilities because each of its major rivers (the Colorado, the North Platte and the Arkansas) is governed as well by interstate compacts with downstream states. These compacts are subject to judicial review, interpretation and enforcement under the original jurisdiction of the U.S. Supreme Court to resolve disputes among the states. In 1948, Colorado and Kansas reached an agreement that apportioned the water of the Arkansas River; Colorado was apportioned 60% of the water while Kansas is apportioned 40% of the River’s flow. In order to comply with Colorado’s obligations under the Arkansas River Compact, therefore, water rights on the Arkansas and its tributaries (including the Huerfano and Cucharas Rivers) are administered to assure the compact-required water flows at the Colorado-Kansas state line. When necessary, Colorado’s in-state uses are curtailed, in reverse order of priority, to assure compliance with the compact.
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The interstate compacts (beginning with the Colorado River Compact of 1922) increased Colorado’s need to manage its apportioned water to meet the needs of its growing population along the Front Range. Trans-basin diversions (primarily tunnels and canals) were developed, under the Prior Appropriation Doctrine, to divert water from one watershed for conveyance to and use in another. Mainly, water from the Colorado River Basin, west of the Continental Divide, was diverted east to meet the water needs along the earlier developing Front Range by so-called “conservancy districts”. These projects began in the 1930’s and, although many have been in operation for decades, some remain incomplete. Increasingly, further trans-basin diversions are limited not only by competing appropriative water rights in the basins of origin but also by increasingly stringent environmental restrictions.
Stymied in their attempts to import additional surface water from distant watersheds, some municipalities and water providers began to rely on inherently unsustainable ground water “mining” (depleting aquifers for current consumption at a rate in excess of the rate at which natural recharge occurs). After decades of such ground water mining, many of the aquifers on the Front Range have been severely depleted. Some municipalities also purchased farms with water diversion rights and then ceased irrigating the farmland, transferring the water to their urban uses. Because neither the practice of ground water mining nor the practice of “buying up and drying up” farmland is sustainable, Colorado law has placed limits and regulations on both practices.
Recognizing the need for additional water sources along the Front Range, the Colorado Water Conservation Board published its 2050 Municipal and Industrial Gap Analysis in 2011. This report estimates that the Arkansas and South Platte Basins (essentially the Front Range) will have a combined average annual supply shortage of 130,000 acre-feet of water by 2050. The difficulty and expense of incremental trans-mountain diversions coupled with the unsustainability of ground water mining and agricultural-to-urban transfers—as documented by the Colorado Water Conservation Board—motivates Front Range water purveyors to address the projected gap and to identify and develop inherently scarce renewable sources of water.
In order to address a portion of the identified gap between forecast supply and demand within the Arkansas Basin and to provide a substitute source of water for Front Range communities that are too reliant on depleted ground water aquifers, the design and planning for the Southern Delivery System anticipate that other water purveyors will subscribe for pipeline capacity to transport renewable water supplies to their service areas.
As early as 2005, the Colorado General Assembly created basin roundtables to convene regional water purveyors to address the looming municipal supply gap. The roundtables were charged to identify “projects and methods to meet the consumptive and non-consumptive needs of the basin.” (Colorado House Bill 05-1177). The potential solutions include Identified Plans and Process or IPPs, Conservation, New Supply Development, and Alternatives to Agricultural Transfers.
The Arkansas River Basin Roundtable has only a few IPPs to meet the water supply gap identified in its basin. The most significant of the Arkansas Basin IPPs is the Southern Delivery System, a two-stage development project budgeted at $1.45 billion primarily funded by four regional water purveyors including Colorado Springs. Phase One of the 62-mile water supply pipeline began operations in 2016. The Southern Delivery System connects the U.S. Bureau of Reclamation’s Pueblo Reservoir on the Arkansas River, the point of delivery under the U.S. Bureau of Reclamation contracts, with the purveyors’ service areas.
Employees
At March 31, 2019, we had three full-time employees, of which two are employed at our Aurora headquarters and one works remotely from Pueblo and Huerfano County area as our ditch manager. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Available Information
We file reports with the SEC, which we make available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file it with the SEC. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
| Two Rivers Water & Farming Company | 2018 Financials | Page 9 |
| Item 1A. | 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.
Risk Factors Relating to Our Business
We can give no assurance of success or profitability to investors.
There is no assurance that we will generate revenues or profits. We have not been profitable in the past and had an accumulated deficit of approximately $95 million as of December 31, 2018. While for the year ended December 31, 2018 we recorded a net profit of approximately $2.7 million, we incurred an operational use of cash of approximately $1.1 million. Previously, we incurred net losses from continuing operations before taxes (excluding results from discontinued operations) of approximately $11.7 million in 2017.
Our success will depend, to a large degree, on the expertise and experience of our sole executive officer.
Effective January 17, 2018, the board of directors appointed Wayne Harding, our Chief Executive Officer, to also serve as our interim Chief Financial Officer. Mr. Harding is our sole executive officer. Our success in identifying investment opportunities and pursuing and managing such investments will be, to a large degree, dependent upon Mr. Harding’s expertise and experience and his ability to attract and retain quality personnel. We do not maintain a key person life insurance policy on Mr. Harding. The loss of Mr. Harding would significantly delay or prevent the achievement of our business objectives. If Mr. Harding is unable or unwilling to continue his employment with us, we may not be able to replace him in a timely manner and we will have no executive personnel with experience operating our company. We may incur additional expenses to recruit and retain qualified replacements.
Our current management resources may not be sufficient for the future, and we have no assurance that we can attract additional qualified personnel.
There can be no assurance that the current level of management is sufficient to perform all responsibilities necessary or beneficial for management to perform. Our success in attracting additional qualified personnel will depend on many factors, including our ability to provide them with competitive compensation arrangements, equity participation and other benefits. There is no assurance that we will be successful in attracting highly qualified individuals in key management positions.
Any default on mortgages relating to our water and land could have a material impact on our business.
Our water rights and land are subject to mortgages. If we default on a mortgage, we could lose the underlying assets. Further, the Company has provided collateral on some of its land and water assets to investors in GrowCo. Currently there is a complaint filed against GrowCo from a large holder of GrowCo’s $4 million secured note for non-payment.
The adequacy of our water supplies depends upon a variety of uncontrollable factors.
The adequacy of our water supplies for farmland leased to others and municipalities varies from year to year depending upon a variety of factors, including:
| ● | rainfall, runoff, flood control and availability of reservoir storage, | |
| ● | availability of water in the Arkansas River watersheds, | |
| ● | the amount of useable water stored in reservoirs and ground water basins, |
| Two Rivers Water & Farming Company | 2018 Financials | Page 10 |
| ● | the amount of water used by our customers and others, | |
| ● | water quality, and | |
| ● | legal limitations on production, diversion, storage, conveyance and use. |
Population growth and increases in the amount of water used in urban areas have caused increased stress on surface water supplies and ground water basins.
We obtain our water supply from the Cucharas and Huerfano Rivers. Our water supply and storage may be subject to interruption or reduction if there is an interruption or reduction in water supplies available to us. Our supply and storage business is dependent upon our ability to meet the requirements of the Colorado Water Engineer’s office regarding our water rights priorities.
Water shortages may:
| ● | adversely affect our supply thereby limiting our revenue, or | |
| ● | adversely affect our operating costs, for instance, by increasing the cost to purchase or lease required water if we are obligated to supply water under a lease agreement. |
Our water rights may not yield full flow every year.
Water rights in Colorado are subject to the Prior Appropriation Doctrine, which accords lower priority to junior water rights. Water rights that are senior (such as our Butte Valley Ditch Right Number 1 dating from 1862) have priority over junior rights (such as our Huerfano Valley Ditch Right Number 342 dating from 1905) as to use in dry years, and junior rights may not get water or as much water as they wish, if senior rights use it all.
We may be subject to periodic litigation and other regulatory proceedings. These proceedings may be affected by changes in laws and government regulations or changes in the enforcement thereof.
From time to time, we may be involved in lawsuits and regulatory actions relating to our business, certain of which may be in jurisdictions with reputations for aggressive application of laws and procedures against corporate defendants. Some of these actions have the potential for significant statutory penalties, and compensatory, treble or punitive damages. For example, on April 3, 2018, Two Rivers was notified that the State of Colorado had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with a consent decree to bring the Cucharas #5 reservoir down to silt level by March 31, 2018. 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.
| Two Rivers Water & Farming Company | 2018 Financials | Page 11 |
We may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our water businesses.
Regulatory agencies may also change their rules and policies, which may adversely affect our profitability and cash flows. We may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our water businesses. The water rights we control provide significant legal and pecuniary benefits. Any change in Colorado law that affects water rights, either in general or specific to our company, could likely have a material impact on us.
We operate in a highly competitive industry and potential competitors could duplicate our business model.
We are involved in a highly competitive industry where we compete with numerous other companies who offer similar facilities to lease to those we offer. There is no aspect of our business, which is protected by patents, copyrights, trademarks, or trade names. As a result, potential competitors could duplicate our business model with little effort. Some of our potential competitors may have significantly greater resources than we have, which may make it difficult for us to compete. There can be no assurance that we will be able to successfully compete against these other entities.
We have substantial competitors who have an advantage over us in resources and management.
Most of our competitors in the water resource management business have significantly greater financial resources, technical expertise and managerial capabilities than us and, consequently, we may be at a competitive disadvantage in identifying and developing or exploring suitable business opportunities and/or acquisitions. Competitors’ resources could overwhelm our restricted efforts and adversely impact our operational performance.
Our operations are geographically concentrated within Colorado.
Our operations are concentrated in Southeastern Colorado. As a result, our financial results are subject to political impacts, regional weather conditions, available water supply, available labor supply, utility cost, regulatory risks, economic conditions and other factors affecting Colorado, our area of operation. Southeastern Colorado has been hard hit by the on-going economic crisis. Colorado is raising taxes in order to balance the state budget and jobs may be lost to other states which are perceived as having a more business friendly climate, thereby exacerbating the impact of the financial crisis in Colorado.
The inability to attract and retain qualified employees could significantly harm our business.
The market for skilled executive officers and employees knowledgeable in water rights is highly competitive and historically has experienced a high rate of turnover. Competition for quality officers and employees may lead to increased hiring and retention costs.
Changing economic conditions and the effect of such changes on accounting estimates could have a material impact on our results of operations.
The Company has also made a number of estimates and assumptions relating to the reporting of its assets and liabilities and the disclosure of contingent assets and liabilities to prepare its consolidated financial statements pursuant to the rules and regulations of the SEC and other accounting rulemaking authorities. Such estimates primarily relate to the valuation of stock options for recording equity-based compensation expense, allowances for doubtful accounts receivable, valuation allowances for deferred tax assets, legal matters and other contingencies, as applicable. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in the economic climates in which the Company operates may affect these estimates and will be reflected in the Company’s financial statements in the event they occur. Such changes could result in a material impact on the Company’s results of operations.
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The requirements of being a public company may strain our resources and distract management.
As a result of filing the registration statement, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
We may incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate governance requirements. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Ineffective internal controls could impact the Company’s business and operating results.
The Company’s internal control over financial reporting may not prevent or detect misstatements because of the inherent limitations of internal controls, including the possibility of human error, the circumvention or overriding of controls, poorly designed or ineffective controls, or fraud. Internal controls that are deemed to be effective can provide only reasonable assurance with respect to the preparation and fair presentation of the Company’s financial statements. If the Company fails to maintain the adequacy of its internal controls, including the failure to implement new or improve existing controls, or fails to properly execute or properly test these controls, the Company’s business and operating results could be negatively impacted and the Company could fail to meet its financial reporting obligations.
Risk Factors Related to Ownership of Common Stock
We may in the future issue more shares of capital stock, which could cause a loss of control by present management and current shareholders and/or dilution to investors.
There may be substantial dilution to our shareholders as a result of future decisions of the board of directors to issue shares without shareholder approval for cash, services, or acquisitions at prices solely determined by the board. Additionally, upon issuance, such shares could represent a majority of the voting power and equity of our company. The result of such an issuance would be those new shareholders and management would control our company, and persons unknown could replace existing management at such time.
Our common shareholders could face substantial potential dilution from outstanding common stock equivalents.
As of April 11, 2019, 50,350,180 shares of common stock were outstanding. If holders convert their TR Capital Partners, LLC preferred units into shares of common stock, we would issue up to an additional 29,754,782 shares of common stock. In addition, as of April 5, 2019, there were additional warrants outstanding to acquire 3,368,952 at prices between $0.32 to $1.00 per common share. As of December 31, 2018 there were a total of 2,879,215 options outstanding to purchase the Company’s common shares with strike prices between $0.13 to $1.25 per share. Investors in the preferred units of GrowCo Partners 1, LLC (GCP1) hold 7,377,019 preferred units. Each GCP1 preferred unit can be exchanged into one Company’s common share.
We need additional capital in the future to finance our operations, which we may not be able to raise or it may only be available on terms unfavorable to us or our stockholders, which may result in our inability to fund our working capital requirements and harm our operational results.
At December 31, 2018 we were critically low on cash, which was approximately $6,000. We have and expect to continue to have substantial capital expenditure and working capital needs. We do not now have funds sufficient to fund our operations at their current level for the next 12 months. We need to raise additional cash to fund our operations and implement our business plan. We are maintaining an on-going effort to locate sources of additional funding, without which we will not be able to remain a viable entity. If we are able to obtain the financing required to remain in business, eventually achieving operating profits will require substantially increasing revenues or drastically reducing expenses from their current levels or both. If we are able to obtain the required financing to remain in business, future operating results depend upon a number of factors that are outside of our control. The expected operating losses, coupled with a lack of liquidity, raise a substantial doubt about our ability to continue as a going concern. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced, and these newly issued securities might have rights, preferences or privileges senior to those of existing stockholders.
| Two Rivers Water & Farming Company | 2018 Financials | Page 13 |
The regulation of penny stocks by SEC and FINRA may discourage the tradability of common stock.
We are classified as a “penny stock” company. The common stock currently trades on the OTCQB Market and is subject to an SEC rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 (not including the principal residence) or having an annual income that exceeds $250,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers in this offering to sell their securities in any market that may develop therefore because it imposes additional regulatory burdens on penny stock transactions.
In addition, the SEC has adopted a number of rules to regulate “penny stocks,” including Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7 and 15g-9 under the Exchange Act. Common stock constitutes a “penny stock” within the meaning of these rules, and these rules imposes additional regulatory burdens that may affect the ability of holders to sell common stock in any market that may develop.
The market for penny stocks has suffered in recent years from patterns of fraud and abuse, including:
| ● | control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; | |
| ● | manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; | |
| ● | “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; | |
| ● | excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and | |
| ● | wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, causing investor losses. |
We cannot dictate or anticipate the behavior of the market or of broker-dealers who participate in the market.
Rule 144 sales of common stock in the future may have a depressive effect on our stock price.
Some of the outstanding shares of common stock held by our officers, directors and affiliated shareholders are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who has held restricted securities for six months may sell without restriction, except for affiliates which, under certain conditions, may sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company’s outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registration of shares of common stock of current shareholders, may have a depressive effect upon the price of common stock in any market that may develop. There may be substantial dilution to our shareholders as a result of future decisions of the board of directors to issue shares without shareholder approval for cash, services or acquisitions at prices determined solely by the board.
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Our stock is thinly traded and as a result shareholders may be unable to sell at or near ask prices or at all.
Shares of common stock are thinly traded on the OTCQB market, meaning that the number of persons interested in purchasing common stock at or near ask prices at any given time may be relatively small. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume and that even if we came to the attention of such persons, they may be risk-averse and reluctant to follow an early stage company or purchase or recommend the purchase of any of our securities until such time as we became more seasoned and profitable. As a consequence, there may be periods of several days or more when trading activity in our securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect its securities price. We cannot give you any assurance that a broader or more active public trading market for our common securities will be developed or sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if they desire to liquidate shares of common stock.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Our corporate headquarters are located in Aurora, Colorado, where we lease 1,554 square feet of office space pursuant to a lease agreement that will expire on March 31, 2020. We believe that our current office facilities will be sufficient to meet our operational needs for the remainder of the existing lease term and that, upon the expiration of our current lease term, we will be able to extend our lease or lease suitable replacement office space as needed on acceptable, commercially reasonable terms.
We operate in the combined watershed area of the Huerfano River and Cucharas River in the Arkansas River Basin, an area encompassing approximately 1,500 square miles on the southern Front Range in Colorado. As of December 31, 2018, we managed a total of 6,265 acres of land that we acquired since 2009, as shown in the following table. The following table presents the number of acres we owned by usage as of the dates indicated:
| As of December 31, | ||||||||
| 2018 | 2017 | |||||||
| Irrigable farmland: | ||||||||
| Farmed | - | - | ||||||
| Developed but not farmed | 725 | 725 | ||||||
| Undeveloped | 1,647 | 1,920 | ||||||
| Total irrigable land | 2,372 | 2,645 | ||||||
| Non-producing land: | ||||||||
| Greenhouse development | 157 | 157 | ||||||
| Grazing land | 3,097 | 3,097 | ||||||
| Strategic water holdings | 239 | 239 | ||||||
| Other strategic holdings | 400 | 400 | ||||||
| Total non-producing land | 3,893 | 3,893 | ||||||
| Totals | 6,265 | 6,538 | ||||||
The following table presents the number of acres we owned by location as of the dates indicated:
| As of December 31, | ||||||||
| 2018 | 2017 | |||||||
| El Paso | 2,066 | 2,339 | ||||||
| Huerfano | 2,324 | 2,324 | ||||||
| Pueblo | 1,875 | 1,875 | ||||||
| Totals | 6,265 | 6,538 | ||||||
| Two Rivers Water & Farming Company | 2018 Financials | Page 15 |
| ITEM 3. | LEGAL PROCEEDINGS |
During 2018, the Company settled a lawsuit brought by a prior tenant of the GrowCo Partners 1, LLC greenhouse, Suncanna, LLC. The Company paid $50,000 to settle the Suncanna legal action.
Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.
The State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two Rivers to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November 2018. The case against Two Rivers and all the individuals is currently scheduled for trial starting October 28, 2019. The Company has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines.
On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey Wells and John Stroh demanding Two Rivers pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite (“RCA”) for services rendered to the former board members at their behest while members of the board. The $139,000 is included in our accounts payable on the balance sheet. At present, the mater has been settled pending payments by Two Rivers to RCA.
On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims. A trial has been set for November 2019.
On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees. The Blue Green note is also secured by certain water and land property owned by Two Rivers. As a result of Blue Green’s action, the Company has recorded a contingent liability of $2,359,000, which represents a current appraisal of the assets pledged by the Company.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
| Two Rivers Water & Farming Company | 2018 Financials | Page 16 |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Common Stock
Common Stock is traded in the over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority, or FINRA. On September 17, 2007, common stock began trading on the over-the-counter bulletin board as Navidec Financial Services, under the symbol “NVDF”. On October 13, 2010, due to a name change the common stock began trading on the over-the-counter QB market under the symbol “TURV”.
The following table sets forth the range of high and low bid quotations for common stock during each quarter of 2018 and 2017. 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.
| 2018 | High | Low | ||||||
| Quarter ending December 31 | $ | 0.28 | $ | 0.10 | ||||
| Quarter ending September 30 | $ | 0.32 | $ | 0.105 | ||||
| Quarter ending June 30 | $ | 0.26 | $ | 0.14 | ||||
| Quarter ending March 31 | $ | 0.58 | $ | 0.20 | ||||
| 2017 | ||||||||
| Quarter ending December 31 | $ | 0.52 | $ | 0.29 | ||||
| Quarter ending September 30 | $ | 0.82 | $ | 0.23 | ||||
| Quarter ending June 30 | $ | 0.64 | $ | 0.30 | ||||
| Quarter ending March 31 | $ | 0.81 | $ | 0.49 | ||||
The last sale price of common stock on April 5, 2019 on the OTCQB market was $0.29 per share. As of December 31, 2018, there were approximately 254 holders of record. We estimate that there are approximately 6,000 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.
Our transfer agent is Broadridge Financial Solutions, Inc., 1717 Arch St., Suite 1300, Philadelphia, Pennsylvania 19103, phone: (215) 553-5400.
Dividends on Common Stock
We have never declared or paid any cash or stock dividends to holders of common stock. Any future dividends would be declared at the discretion of the board of directors and would depend upon such factors as the board deems relevant, including our ability to generate positive cash flows from operations.
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.
| Two Rivers Water & Farming Company | 2018 Financials | Page 17 |
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.
Recent Sales of Unregistered Securities
During the year ended December 31, 2018, Two Rivers had the following common stock transactions:
| ● | 874,250 common stock to Black Mountain for a $100,000 in principal reduction in its note payable. | |
| ● | 1,090,957 common stock issued to Spotfin Funding for financial services. These shares issued were expensed in the previous year. | |
| ● | 14,840 common stock issued for a conversion from TR Capital into the Company’s common shares. These shares issued were expensed in the previous year. | |
| ● | 118,000 common stock issued for a RSU exercise. The RSU expense was recognized in a previous year. | |
| ● | 6,800,000 common stock issued for potential equity loans to be made in 2019. | |
| ● | 2,196,154 common stock issued to Powderhorn/Silverback Securities for a partial payment on convertible debt. | |
| ● | 900,000 common stock issued to Black Mountain for the final payment of $138,000 on its note payable. | |
| ● | 475,452 common stock issued to Morningview for a principal reduction in its note payable. | |
| ● | 14,900 common stock issued to three individuals assisting with investor relations. | |
| ● | 200,000 common stock issued to an investor relations firm. | |
| ● | 139,985 common stock issued to an investor for his conversion from TR Capital Partners, LLC. |
All of the sales of unregistered securities were made in reliance upon Regulation D and Section 4(2) of the Securities Act of 1933. Cash received from the above transactions were used for general administrative purposes.
| ITEM 6. | SELECTED FINANCIAL INFORMATION |
Not applicable.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the other financial information included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under “Risk Factors” and elsewhere in this report.
Overview
In the short-term, our business model is designed to provide us with increased profitability and cash flow that will enable us to acquire and develop additional water rights and infrastructure. We seek to concentrate our acquisitions on water rights and infrastructure that are, in part, owned by municipalities, which can alleviate and expedite the legal and political processes necessary for municipal consumers to obtain excess water.
Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. In October 2016 we began to focus on monetizing our assets by investing strategically in assets that we believe offer opportunities for significant future returns for our shareholders and by selling those assets we determine will not yield those returns. As the result of that process, the management of water has become our core business. Our water asset total drainage area spans over 1,500 square miles and drops in elevation from over 14,000 feet to 4,500 feet at the confluence of the Arkansas River, just east of Pueblo, Colorado. We operate in a natural, gravity fed water alluvial, which is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors. Our water development operations and strategy are described previously under “Our Water Operations.”
| Two Rivers Water & Farming Company | 2018 Financials | Page 18 |
Our principal investments since commencing operations in 2009, and the status of those investments following the implementation of our monetization strategy in 2016, are described below:
| ● | HCIC: From 2009 to 2010 we purchased 95% of the outstanding shares of Huerfano-Cucharas Irrigation Company, or HCIC, in a series of transactions for $24.2 million in cash, promissory notes and Two Rivers’ common stock. HCIC is a mutual ditch company formed in 1944, and we have used its water rights and facilities to supply some of our farmland with irrigation water. In the future, we will use these water rights to supply water to farmland we lease to others and to implement our new water strategy. |
| ● | Additional Farmland: From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s ditch system for purchase prices totaling $1.4 million in cash and seller carry back financing. In 2012 we acquired 1,584 acres in Butte Valley for $509,000 in cash and seller carry back financing. In 2016, we returned 187 acres of Butte Valley land back to the holder of seller carry back financing in exchange for forgiveness on $187,000 of debt and associated accrued interest. |
| ● | Orlando: In 2011 we acquired Orlando Reservoir No. 2 Company, LLC, or Orlando, for $3.45 million in cash, promissory notes and common stock. Our ownership of Orlando increases the reliability of water supplies for our farmland in the Huerfano and Pueblo river basins. We undertook a program to refurbish and restore Orlando’s diversion structure, storage reservoirs and conveyance system. During the period from November 2011 to February 2012, we constructed new outlet works, and in 2012 we reconstructed the diversion structure, which takes water from the Huerfano River for storage in the Orlando reservoir and then conveyance to irrigate our nearby leased farmland. Additional renovation projects will be completed as necessary to provide reliable water supplies for farmland we lease to others and community use. |
| ● | DFP (discontinued operations): In 2012 we acquired Dionisio Farms & Produce, Inc., or DFP, for $3.4 million in cash and promissory notes. DFP, which has operated for more than 60 years, produces high-value fruits and vegetables as well as fodder crops. Through this acquisition, we obtained 146 acres of irrigable farmland, 146 shares of the Bessemer Ditch Irrigation Company, a senior water right holder on the main stem of the Arkansas River and 2 supplemental ground water wells. As part of the acquisition, we entered into leases for an additional 279 irrigable acres. In late 2016, based on three years of operational losses, we decided to sell DFP assets and wind down our produce growing and distribution business, and during the first quarter of 2017 we sold the DFP irrigated farmland and the associated DFP produce business that no longer served our strategic vision of water management |
| ● | GrowCo (no longer consolidated as of April 1, 2018): We formed GrowCo, Inc., or GrowCo, in May 2014 for the purpose of constructing state-of-the-art computer-controlled greenhouses to be leased to licensed marijuana growers throughout the United States. GrowCo is not a licensed marijuana grower or retailer. GrowCo does not “touch the plant” and only provides growing infrastructure as a landlord for licensed marijuana grower tenants along with support and administrative services. In August 2014 we announced we were reserving 10 million of the GrowCo shares for distribution to holders of common stock as of four record dates (January 1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after a registration statement for GrowCo common shares has been filed and declared effective, which has not yet occurred. These reserved shares are currently being held by GrowCo with GrowCo having voting rights until distribution. Currently, GrowCo has approximately 35 million common shares outstanding, of which, Two Rivers owns 10,000,000 shares. Due to Two Rivers’ loss of management control, effective April 1, 2018 Two Rivers no longer consolidates GrowCo and GrowCo’s related entities into Two Rivers’ consolidated financial statements. Two Rivers’ has fully reserved for its GrowCo investment. Two Rivers’ records its investment in GrowCo Partners 1, LLC (the owner of a greenhouse and associated warehouse) on the equity method of accounting. |
| ● | Water Redev: We formed Water Redevelopment Company, or Water Redev, in February 2017 to separate our water assets from the rest of our business and to enable additional raising of capital solely for the purpose of investing in our water assets. Water Redev is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management and delivery, as further described in “Our Water Operations” below. |
| Two Rivers Water & Farming Company | 2018 Financials | Page 19 |
Revenue
Water
During fiscal year 2017 we had negligible revenues from our water business as our new initiatives have not yet gained traction. We also experienced negligible water revenues in 2018 as we begin our reinvestment into our water assets. In 2019, we expect that revenue will be generated from the leasing of water from our storage facilities, the selling of water taps, and the leasing of land and water to agricultural users including marijuana and hemp growers.
Greenhouse Leasing
GCP1 leased the first greenhouse and warehouse to related party Johnny Cannaseed pursuant to a lease agreement dated August 4, 2016, which was subsequently terminated effective January 31, 2018. The lease agreement was classified as an operating lease because it does not meet any of the four criteria which listed in ASC 840-10-25,“Lease Classification Criteria”. Before termination, Johnny Cannaseed subleased the greenhouse and warehouse to two licensed marijuana growers.
Revenue from the first half of the greenhouse (GCP1-1) began accruing on December 1, 2016. For the year ended December 31, 2017, total lease revenue from GCP1-1 was $620,000. The second half of the greenhouse (GCP1-2) began accruing revenue on March 1, 2017. However, due to non-payment, Johnny Cannaseed evicted the GCP1-2 tenant in December 2017. Concurrently GCP1-2 remains unoccupied.
Effective February 1, 2018, the Johnny Canaseed lease was mutually terminated. This lease was replaced by a lease to Amerijuna LLC, effective February 1, 2018 and expiring August 31, 2020. Due to non-payment of rent, Amerijuana was evicted in July 2018. GCP1, the entire greenhouse and warehouse, was re-leased to a hemp focused tenant.
Due to Two Rivers’ loss of management control, effective April 1, 2018 Two Rivers no longer consolidates GrowCo and GrowCo’s related entities into Two Rivers’ consolidated financial statements. Two Rivers’ has fully reserved for its GrowCo investment. Two Rivers’ records its investment in GrowCo Partners 1, LLC (the owner of a greenhouse and associated warehouse) on the equity method of accounting.
Related Party Transactions
Pursuant to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2018, management has evaluated related parties and all transactions associated with those and determined that no transactions exist which would require disclosure, except as disclosed below:
| ● | In August 2017, Mr. Harding loaned the Company $50,000 in the El Paso Land Notes. | |
| ● | In November 2018, the following board members resigned: |
| ○ | Samuel Morris Jr. | |
| ○ | Michael Harnish | |
| ○ | Chris Bragg | |
| ○ | T. Keith Wiggins | |
| ○ | James Cochran |
| ● | In December 2018, the following board members were appointed until the next annual meeting of shareholders: |
| ○ | Thomas Williams | |
| ○ | James Kylstad | |
| ○ | Layne Downs |
| ● | On December 1, 2018, the prior board of directors, Messrs. Harding, Morris, Wiggins, Bragg, Harnish and Cochran, paid, on behalf of Two Rivers, $44,800 ($6,400 per director) to purchase a tail policy on the prior directors and officers insurance. On December 10, 2018, these amounts were repaid in full including a total of $600 in interest. | |
| ● | On December 10, 2018 Wayne Harding, Company Chief Executive Officer provided a short-term loan to Two Rivers of $2,500. The loan is secured by the El Paso county land assets of the Two Rivers and carried an interest rate of 12%. The note remains outstanding. | |
| ● | On December 17, 2018, Wayne Harding provided a short-term loan to Two Rivers of $15,000. It has the same terms and security as the December 10, 2018 note. The note remains outstanding. | |
| ● | Mr. Harding loaned the Company $2,500 in January 2018. |
| Two Rivers Water & Farming Company | 2018 Financials | Page 20 |
Results of Operations
Year ended December 31, 2018 compared to year ended December 31, 2017
For the year ended December 31, 2017 our revenues were predominantly derived from our greenhouse leasing activities. Effective April 1, 2018, we discontinued the consolidation of GrowCo and related entities that provided Leasing – Greenhouse revenue. For the year ended December 31, 2018 the majority of our $66,000 was from farm and grazing leases.
During the year ended December 31, 2018, expenses from operations were approximately $6,493,000 compared to approximately $9,070,000 for the year ended December 31, 2017. The decrease of $2,577,000 was primarily due to recognition of an impairment of our water infrastructure of $6,900,000 in 2017 partially offset by a recognition of $1,800,000 for the Cucharas #5 dam deconstruction by the State of Colorado with associated fees and penalties, a reserve on a loss on an equity offering of $1,632 and higher general and administrative expenses in 2018.
During the year ended December 31, 2018, other income was approximately $10,952,000 compared to expenses of approximately $2,583,000 for the year ended December 31, 2017. The difference of $13,535,000 was the result of a reduction of $980,000 in interest expense (largely due to the deconsolidation of GrowCo), a non cash recognition of a $12,773,000 from a gain from the deconsolidation of GrowCo and a $238,000 gain from sales of land, offset mostly by a $751,000 loss on the Company’s investment in GrowCo, $248,000 loss on debt extinguishment, and loss on conversion of debt of $88,000.
These figures produced a net income from continuing operations of approximately $4,525,000 for the year ended December 31, 2018 compared to a net loss of approximately $11,653,000 for the year ended December 31, 2017.
Loss due to discontinued operations from the GrowCo deconsolidation was approximately $810,000 for the year ended December 31, 2018. There was a loss from discontinue operations from DFP for the year ended December 31, 2017 of approximately $1,045,000.
Preferred distributions for the year ended December 31, 2018 was approximately $1,008,000 compared to approximately $863,000 for the year ended December 31, 2017.
Net loss attributable to noncontrolling interests was approximately $7,000 for the year ended December 31, 2018 compared to a loss of approximately $637,000 for the year ended December 31, 2017.
The above produced income to Two Rivers common shareholders of approximately $2,714,000 for the year ended December 31, 2018 compared to approximately $12,924,000 loss for the year ended December 31, 2017.
Liquidity and Capital Resources
Resources
We have expanded our operations relying on various funding mechanisms, including debt, convertible debt and equity capital. Since inception, we have raised and invested over $81 million to acquire, improve, integrate farm/water assets, launch related businesses, and support operations.
We believe with the anticipated influx of additional capital from strategic partners we will have sufficient capital to meet our anticipated cash needs for at least the next twelve months. In January and February 2019, the Company engaged in discussions with respect to strategic alternatives that would, among other things, strengthen and expand our business operations and enable the Company to raise additional capital. As disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2019, the Company entered into a share exchange agreement on February 21, 2019, that facilitated the Company’s receipt of working capital and provide strategic, vertically integrated hemp-focused businesses.
Our future working capital requirements will depend on many factors, including the expansion of water projects and expansion of our greenhouse development. To the extent our cash, cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We also may need to raise additional funds in the event we determine in the future to affect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to affect an equity or debt financing on terms acceptable to us or at all.
| Two Rivers Water & Farming Company | 2018 Financials | Page 21 |
We historically have funded our operations primarily from the following sources:
| ● | equity and debt proceeds through private placements of Parent Company and subsidiaries securities; | |
| ● | revenue generated from operations; and | |
| ● | loans and lines of credit. |
At the present time we have no available line or letters of credit.
Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital. As of December 31, 2018, we had cash and cash equivalents of approximately $6,000. Cash flow consumed by our operating activities totaled approximately $1,060,000 for the year ended December 31, 2018 compared to operating activities consuming approximately $2,898,000 for the year ended December 31, 2017.
As of December 31, 2018, we had approximately $64,000 in current assets and approximately $20,092,000 in current liabilities. A large portion of the current liabilities ($7,065,000) is from the HCIC seller carry back notes, some of which were due June 30, 2016. As of December 31, 2018, we are in default on the HCIC note payments. As a result, the entire amount of the notes has been classified as current. While there is no assurance, management believes it will be successful in restructuring these notes and bring them current. Currently the Company is working with an outside party to purchase the HCIC notes and restructure the debt.
Cash used in investing activities for the year ended December 31, 2018 was approximately $13,000, due to a net of $127,000 from the sale of property and equipment offset by $140,000 in purchasing of water assets. Cash provided in investing activities for the year ended December 31, 2017 was approximately $1,215,000. This was comprised of $1,721,000 from the sale of property and equipment offset by approximately $506,000 in construction in progress.
Cash produced in financing activities was approximately $1,065,000 for the year ended December 31, 2018 compared to a production of cash of approximately $1,547,000 for the year ended December 31, 2017. The decrease of approximately $482,000 was due to a reduction of securities offerings.
Requirements
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 are $2,400. The lease terminates on March 31, 2020. The amounts due at the base rate for our new offices are as follows:
| Period | Amount Due | ||||
| 2019 | $ | 29,000 | |||
| 2020 | $ | 7,000 | |||
Below is a table showing our anticipated principal payments due by periods.
| Less than 1 year | 1-3 years | 4+ years | Total | |||||||||||||
| Long Term Debt Obligations | $ | 8,162,000 | $ | 712,000 | $ | 461,000 | $ | 9,335,000 | ||||||||
| Capital Lease Obligations | - | - | - | - | ||||||||||||
| Operating Lease Obligations | 25,200 | 39,600 | 25,200 | 90,000 | ||||||||||||
| Purchase and Development Obligations | - | - | - | - | ||||||||||||
| Other Long-term Obligations | - | - | - | - | ||||||||||||
| Total | $ | 8,187,200 | $ | 751,600 | $ | 486,200 | $ | 9,425,000 | ||||||||
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results from operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements beginning on page F-10 of this document. Note that our preparation of this document requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
| Two Rivers Water & Farming Company | 2018 Financials | Page 22 |
Revenue Recognition
Leasing - Greenhouse
During the year ending December 31, 2017, GrowCo Partners 1, LLC, leased its only currently operating greenhouse and warehouse to a related party Johnny Cannaseed pursuant to a lease agreement dated August 4, 2016, which was subsequently terminated effective January 31, 2018. The lease agreement was classified as an operating lease because it does not meet any of the four criteria which listed in ASC 840-10-25,“Lease Classification Criteria”. Before termination, Johnny Cannaseed subleased the greenhouse and warehouse to two licensed marijuana growers.
Revenue from the first half of the greenhouse (GCP1-1) began accruing on December 1, 2016. For the year ended December 31, 2017, total lease revenue from GCP1-1 was $620,000. The second half of the greenhouse (GCP1-2) began accruing revenue on March 1, 2017. However, due to non-payment, Johnny Cannaseed evicted the GCP1-2 tenant in December 2017.
Effective February 1, 2018, the Johnny Cannaseed lease was mutually terminated. This lease was replaced by a lease to Amerijuana LLC, effective February 1, 2018 and expiring August 31, 2020. Due to not receiving the full rental payments required by the Amerijuana, Amerijuana was evicted in July 2018. On March 2019 GCP1 entered into a new lease for the entire greenhouse and warehouse with a hemp-focused business.
Since April 1, 2018, it was determined that GrowCo, GrowCo Partners 1, LLC, and other GrowCo related entities no longer required consolidation into Two Rivers’ financial statements. The deconsolidation was performed in the quarter ended June 30, 2018 and retroactive to January 1, 2018.
Member Assessments
Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by the Two Rivers to HCIC are eliminated in consolidation of the financial statements. Assessments paid by others are recorded as Other Income from operations.
HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments.
Debt and Equity
Two Rivers accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt, and allocates proceeds received to the warrants based on relative fair values.
Two Rivers also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. Two Rivers would recognize the BCF by allocating the intrinsic value of the conversion option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred shares or debt instruments. The Company recognized BCF in the amount of $82,000 during the year ended December 31, 2018.
Stock Based Compensation
We account for share-based payments in accordance with FASB Accounting Standards Codification (“ASC”) 710-10-55. We use the Black-Scholes option valuation model to estimate the fair value of stock options and warrants issued under ASC 710-10-55. For the years ended December 31, 2018 and 2017, equity compensation in the form of stock options, warrants and grants of restricted stock that vested totaled $888,000 (including both Two Rivers and Water Redevelopment Company) and $467,000, respectively.
| Two Rivers Water & Farming Company | 2018 Financials | Page 23 |
Impairments
Once per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not be reversed in future periods.
Prior to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis caused the recognition of $6,900,000 impairment to the water infrastructure.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In July 2017, the FASB issued Accounting Standards Update (“ASU”) “Income Statement – Reporting Comprehensive Income (Topic 220)”. This ASU deals with the reclassification of certain tax effects from Accumulated Other Comprehensive Income. The Company does not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
| Two Rivers Water & Farming Company | 2018 Financials | Page 24 |
In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in the future it may have an impact on its financial statements with the adoption of this new accounting pronouncement.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
Off Balance Sheet Arrangements
We have no significant off-balance sheet transactions, arrangements or obligations.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to the impact of interest rate changes and change in the market values of our real estate properties. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following consolidated financial statements specified by this Item, together with the reports thereon of Eide Bailly LLP, are presented following Item 15 of this Form 10-K:
| ● | Report of Independent Registered Public Accounting Firm. | |
| ● | Consolidated Balance Sheets as of December 31, 2018 and 2017. | |
| ● | Consolidated Statements of Operations for the years ended December 31, 2018 and 2017. | |
| ● | Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017. | |
| ● | Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 2018 and 2017. | |
| ● | Notes to Consolidated Financial Statements. |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
On November 28, 2017, we were notified by Eide Bailly LLP, or Eide Bailly, of its decision to resign as our independent registered public accounting firm.
The reports of Eide Bailly on our consolidated financial statements for the fiscal years ended December 31, 2016 and 2015 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended December 31, 2016 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.
During the fiscal years ended December 31, 2017 and 2018 there were (a) no disagreements with M&K CPAs (“M&K”) 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 M&K, would have caused M&K 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.
| Two Rivers Water & Farming Company | 2018 Financials | Page 25 |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Management’s Report on Disclosure Controls and Procedures
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective such that the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our management, with the participation of our principal executive officer and principal financial officer have conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2018. The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses, which are indicative of many small companies with small staff:
| (i) | inadequate segregation of duties consistent with control objectives; and | |
| (ii) | lack of multiple levels of supervision and review; and | |
| (iii) | lack of written policies to govern related party transactions. |
We believe that the weaknesses identified above have not had any material effect on our financial results. We are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the current fiscal year, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses.
Our management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
| Two Rivers Water & Farming Company | 2018 Financials | Page 26 |
Management’s Remediation Plan
The weaknesses and their related risks are not uncommon in a company of our size because of the limitations in the size and number of staff. Due to our size and nature, segregation of all conflicting duties has not always been possible and may not be economically feasible.
However, we plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes in the current fiscal year as resources allow:
| (i) | Appoint additional qualified personnel to address inadequate segregation of duties and implement modifications to our financial controls to address such inadequacies; and | |
| (ii) | We will attempt to implement the remediation efforts set out herein by the end of the 2019 fiscal year. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. |
Management believes that despite our material weaknesses set forth above, our financial statements for the year ended December 31, 2018 are fairly stated, in all material respects, in accordance with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Effective February 1, 2018, William Gregorak, our Chief Financial Officer, resigned with no disputes with our company. As the result of Mr. Gregorak’s resignation, we have employed an external accountant to assist with preparation of our consolidated financial statements commencing with the quarter and year ended December 31, 2017.
We will continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the facts described above and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.
| ITEM 9B. | OTHER INFORMATION |
None.
| Two Rivers Water & Farming Company | 2018 Financials | Page 27 |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
At December 31, 2018, our officers and directors were the individuals listed below:
| Name | Age | Position | ||
| Wayne Harding | 64 | Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors | ||
| Thomas Williams | 58 | Director, Secretary, Chair of Nominating, Governance and Compensation Committees | ||
| James Kylstad | 66 | Director, Chairman of Audit Committee | ||
| Layne Downs | 65 | Director |
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.
Mr. Harding holds his positions at the pleasure of the board of directors subject to the terms of his employment agreement 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 Mr. Harding 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 the executive officer.
Biographical Information
Wayne E. Harding III serves as our Chief Executive Officer and our Chief Financial Officer. Mr. Harding has served as our Chief Financial Officer and Secretary since September 2009 and served as our controller from 2008 to September 2009. In June 2016 the Board appointed Mr. Harding as the Company’s Chief Executive Officer and he maintained his role as Chief Financial Officer. 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. From 2014 to March 2018, Mr. Harding served 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.
Layne Downs in the past 23 years has been a water broker and an appraiser water rights for a variety of cities, banks and estates. He has served as a water expert witness in court cases. As a water broker, Mr. Downs specializes in moving underground water from one diversion point to another. He has extensive knowledge in conveyance of water right deeds, beneficial use, artesian wells, proof of appropriation or permanent change along with adjudication of well rights.
Thomas Williams has over 30 years experience in the insurance industry. He has served in multiple roles in both originations and administration side of operations. Mr. Williams is currently an officer and director in a Bermuda-based insurance company. He is acting Vice Chairman of Capital Management of Bermuda, formally known as the Travelers of Bermuda one of the first chartered insurance companies in Bermuda. Additionally, he has formed three insurance operations. From 2008 to 2018, Mr. Williams served on the board of GEE Group, Inc., a public company traded on the NYSE American exchange. He chaired the nominating committee and was a member of the Corporate Governance Committee and Audit Committee.
James B. Kylstad has had an extensive 40-year career in banking, finance, public company management and reporting, mergers & acquisitions, and private capital investment. His work has included numerous start-ups, taking companies private to public, taking companies public to private, roll-ups, private sales, IPOs, and liquidations. During his career, Mr. Kylstad has been the Chairman of the Board, director and CEO of a number of public companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers and directors are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based on our review of copies of such reports received, and representations from certain reporting persons, we believe that, during the fiscal year ended December 31, 2018, all of the Section 16(a) filing requirements applicable to our officers and directors were filed in compliance with all applicable requirements.
| Two Rivers Water & Farming Company | 2018 Financials | Page 28 |
| ITEM 11. | EXECUTIVE COMPENSATION |
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning compensation paid to each of the individuals who served as executive officers during 2018:
| 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, | 2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| prior Chief Executive | 2017 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Officer, Chairman (3) | 2016 | (2) | 192,164 | - | - | - | - | - | 12,361 | 204,525 | ||||||||||||||||||||||||||
| Wayne Harding, Chief Executive | 2018 | (6,7) | 168,750 | - | - | - | - | - | 10,800 | 179,550 | ||||||||||||||||||||||||||
| Officer, Chief Financial | 2017 | (6) | 131,250 | - | - | 92,000 | - | - | 10,800 | 234,050 | ||||||||||||||||||||||||||
| Officer & Chairman (4) | 2016 | (5) | 131,379 | - | 33,093 | - | - | - | 6,050 | 170,522 | ||||||||||||||||||||||||||
| William Gregorak, | 2018 | 17,313 | - | - | - | - | - | - | 17,313 | |||||||||||||||||||||||||||
| Chief Financial | 2017 | (9) | 120,000 | 2,790 | - | 22,000 | - | - | 4,800 | 149,590 | ||||||||||||||||||||||||||
| Officer & Secretary (8) | 2016 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Notes:
| (1) | Stock award compensation is based on stock options or RSUs granted, vested and issued during the year. | |
| (2) | Other Compensation is the payment of the health insurance benefit by the Company ($2,361) and office allowance ($10,000). | |
| (3) | Mr. McKowen resigned May 2016. | |
| (4) | Mr. Harding was named CEO in June 2016 and became Chairman in September 2016 | |
| (5) | Other Compensation is the payment of the health insurance benefit by the Company ($6,050). | |
| (6) | Other Compensation is the payment of the health insurance benefit by the Company ($10,800). | |
| (7) | Mr. Harding is compensated at a base of $150,000 per year. The extra $18,750 is due to a timing difference pay between 2017 and 2018. | |
| (8) | Mr. Gregorak was named CFO in March of 2017 and resigned on February 1, 2018. | |
| (9) | Other Compensation is the payment of the health insurance benefit by the Company ($4,800). |
Grants and Issuance of Plan-Based Awards for 2018 and 2017
For the year ended December 31, 2018, the Company do not issue any options to purchase the Company’s common shares to any officer or director.
For the year ended December 31, 2017, the Company issued 225,000 options for common shares to Wayne Harding, with 192,857 shares vesting by December 31, 2018.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth certain information as to unexercised restricted stock units held on December 31, 2018 by the named executive officers.
| Stock Awards | ||||||||||||||||
| Name | Number of Options that have vested (#) | Market value of Options that have vested ($) (1) | Options that have not vested (#) | Market value of stock options that have not vested ($) (1) | ||||||||||||
| Wayne Harding | 892,857 | 151,786 | 32,143 | 5,464 | ||||||||||||
(1) The closing price of our common stock on OTCQB on December 31, 2018 was $0.17
| Two Rivers Water & Farming Company | 2018 Financials | Page 29 |
Employment and Change in Control Agreements
We entered into an employment agreement with Wayne Harding effective as of January 1, 2011. This employment agreement renews automatically for successive one-year terms until either party delivers notice of termination within 30 days of the expiration of the then-current term.
Under each agreement, annual base salary and other compensation is to be reviewed, and may be adjusted upward, no less frequently than quarterly. Mr. Harding’s annual base salary has been $120,000 per year until November 2016, when his salary was increased to $150,000 per year.
On August 22, 2017, Mr. Harding entered into a new compensation agreement. This agreement contains the same terms as the prior agreement with the exception of the expanded definition of “Early Termination: Resignation by the Employee for Good Reason.” This definition has been expanded to include the election or appointment of 50% or more new members of the Company’s board.
The employment agreement provides that Mr. Harding will be entitled, in the event his employment is terminated during the term by the Company without cause (as defined) or by him for good reason (as defined), to (a) receive an amount in cash equal to six months’ base salary at the highest base salary in effect during the twelve months prior to termination plus the amount of the annual bonus, if any, paid to him for the preceding fiscal year, prorated to the termination date and (b) immediate vesting of all non-vested stock options. The agreement also provides for immediate vesting of all non-vested stock options in the event of a change in control, which generally is defined to be a sale or other disposition to a person, entity or group of 50% or more of our consolidated assets. The following table sets forth estimated compensation that would have been payable to Mr. Harding upon termination of employment, assuming termination took place on December 31, 2018, whether in connection with a change in control or otherwise. Mr. Harding held unvested options as of December 31, 2018, and therefore would have been entitled to additional compensation had a change in control occurred as of December 31, 2018.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
| Name | Acceleration
of Compensation Upon Termination | |||
| Wayne Harding | $ | 150,000 | ||
Director Compensation
The following table sets forth information concerning compensation paid to our outside directors for services during 2018:
| Name | Fees earned or paid in cash | Stock options | Total | |||||||||
| Samuel Morris (resigned Nov 2018) | $ | 18,000 | $ | 138,488 | $ | 156,488 | ||||||
| Michael Harnish (resigned Nov 2018) | $ | 18,000 | $ | 236,052 | $ | 254,052 | ||||||
| James Cochran (resigned Nov 2018) | $ | 18,000 | $ | 173,188 | $ | 191,188 | ||||||
| T. Keith Wiggins (resigned Nov 2018) | $ | 18,000 | $ | 147,851 | $ | 165,851 | ||||||
| Christopher Bragg (resigned Nov 2018) | $ | 18,000 | $ | 192,438 | $ | 210,438 | ||||||
| Thomas Williams (nominated Dec 2018) | $ | 1,667 | - | $ | 1,667 | |||||||
| James Kylstad (nominated Dec 2018) | $ | 1,667 | - | $ | 1,667 | |||||||
| Layne Downs (nominated Dec 2018) | $ | 1,667 | - | $ | 1,667 | |||||||
From September 30, 2016 to August 31, 2017, each outside director received $1,000 for each meeting attended in person. Directors were also paid $4,000 per calendar quarter. At the annual meeting of the board of directors on September 7, 2017, the board voted to award each outside director options for 150,000 shares of common stock. These stock option shares vested 1/8 on the date granted with the balance equally over seven quarters commencing December 31, 2017. The chair of the audit committee received an additional 20,000 stock options per year. The chair of the compensation committee received an additional 10,000 stock options per year. Committee chair options vest half immediately, half in six months.
| Two Rivers Water & Farming Company | 2018 Financials | Page 30 |
At the September 7, 2017 board meeting, the Compensation Committee recommended, and the Board approved, to increase each independent director’s quarterly cash compensation from $4,000 per calendar quarter to $5,000 per calendar quarter.
For the year ended December 31, 2018, we incurred a total of approximately $983,000 in compensation to the Company’s independent directors listed above.
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 Rd, #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.
| Two Rivers Water & Farming Company | 2018 Financials | Page 31 |
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 Rd, #140, Aurora, Colorado 80014, Attention: Secretary.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee are Thomas Williams and Layne Downs. Neither Mr. Williams nor Mr. Downs have ever been an officer or employee of our Company or any subsidiary of ours or had any relationship with us during 2018 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 2018, either in person or by teleconference. The board conducted numerous special board meetings during 2018. Each director attended at least 90% of the meetings of the board held in 2018 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.
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 James Kylstad and Thomas Williams, each of whom is an independent director. Mr. Kylstad chairs the audit committee and serves as the audit committee financial expert.
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; |
| Two Rivers Water & Farming Company | 2018 Financials | Page 32 |
| ● | 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 current and prior audit committee met four times during 2018 by teleconference. During 2018, each member of the audit committee attended all of the meetings of the committee held during the year. The audit committee charter is available at http://www.2riverswater.com/governance-documents/.
Compensation Committee
Members of the compensation nominating committee are Thomas Williams and Layne Downs. Mr. Williams 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 2018.
Nominating and Governance Committee
Members of the governance and nominating committee are Thomas Williams and Layne Downs. Mr. Williams chairs this 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 (the “Nominating Criteria”) 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 2018.
Summary of Committee Service
The following is a table showing board members involvement in each committee:
| Name | Audit | Compensation | Nominating/Governance | |||||||||
| Wayne Harding | M | - | - | |||||||||
| Thomas Williams | M | C | C | |||||||||
| James Kylstad | C | - | - | |||||||||
| Layne Downs | - | M | M |
M = Member C = Chair
Audit Committee Report
The audit committee has reviewed and discussed the audited consolidated financial statements of the Two Rivers and its subsidiaries for fiscal 2018 and has discussed these financial statements with the Two Rivers’ management and independent registered public accounting firm for fiscal 2018, M&K CPAs, LLP.
| Two Rivers Water & Farming Company | 2018 Financials | Page 33 |
The audit committee has also received from, and discussed with, M&K CPAs, LLP various communications that the independent registered public accounting firm is required to provide to the audit committee, including the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380) as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
M&K CPAs, LLP also provided the audit committee with the written communications required under regulations of the Public Company Accounting Oversight Board, including communications regarding the independence of the registered public accounting firm. The audit committee has discussed with M&K CPAs, LLP its independence from Two Rivers. The audit committee also considered whether the provision of other, non-audit related services referred to under the heading “Independent Registered Public Accounting Firm Fees and Other Matters” is compatible with maintaining the independence of the registered public accounting firm.
Based on its discussions with management and the independent registered public accounting firm, and its review of the representations and information provided by management and M&K CPAs, LLP, the audit committee recommended to the board of directors that the audited consolidated financial statements be included in the Two Rivers’ Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
AUDIT COMMITTEE
James Kylstad
Thomas Williams
The material in this audit committee report is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing by Two Rivers under the Securities Act or the Securities Exchange Act, whether made before or after the date hereof, and irrespective of any general incorporation language in any such filing.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information regarding the beneficial ownership of common stock as of March 30, 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 and executive officers; and | |
| ● | all of our current directors and executive officers as a group. |
The following table lists the percentage of shares beneficially owned based on 50,350,180 shares of common stock outstanding as of April 11, 2019, plus an additional 1,575,000 options issued that can be exercised by affiliated parties on or before May 30, 2019 (60 days after March 31, 2019). Except as otherwise indicated, all of the shares reflected in the table are common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws.
| Shares Beneficially Owned | ||||||||
| Name of Beneficial Owner | Number | Percentage | ||||||
| Wayne Harding | 1,533,089 | 3.3 | % | |||||
| Thomas Williams | 250,000 | * | ||||||
| James Kylstad | 250,000 | * | ||||||
| Layne Downs | 250,000 | * | ||||||
| All directors and executive officer as a group (4 persons) | 2,283,089 | 4.9 | % | |||||
* Less than 1%
| Two Rivers Water & Farming Company | 2018 Financials | Page 34 |
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 Rd, Suite 140, Aurora CO 80014. Two Rivers has 200,000,000 authorized common shares. There are a total of 10,000,000 common shares under Two Rivers’ 2011 Option Plan.
| ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The following discussion relates to certain transactions that involve both our company and one of our executive officers, directors or five-percent shareholders, each of whom we refer to as a “related party.” For purposes of this discussion, a “related-party transaction” is a transaction, arrangement or relationship in which we participate and in which a related party has a direct or indirect material interest.
Since January 1, 2018 there have been the following related-party transactions, except for the compensation arrangements described under “Executive Compensation” and “Director Compensation”:
| ● | On December 1, 2018, the prior board of directors, Messrs. Harding, Morris, Wiggins, Bragg, Harnish and Cochran, paid, on behalf of Two Rivers, $44,800 ($6,400 per director) to purchase a tail policy on the prior directors and officers insurance. On December 10, 2018, these amounts were repaid in full including a total of $600 in interest. | |
| ● | On December 10, 2018 Wayne Harding, Company Chief Executive Officer provided a short-term loan to Two Rivers of $2,500. The loan is secured by the El Paso county land assets of the Two Rivers and carried an interest rate of 12%. The note remains outstanding. | |
| ● | On December 17, 2018, Wayne Harding provided a short-term loan to Two Rivers of $15,000. It has the same terms and security as the December 10, 2018 note. The note remains outstanding. |
Our board contains four people, of which all are classified as independent members, except for Wayne Harding.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Eide Bailly LLP (“Eide Bailly”) was the principal audit accounting firm and has performed the audit beginning with the year ended December 31, 2011 through December 31, 2016 and performed reviews for the periods ending March 31, 2017, June 30, 2017 and September 30, 2017.
On November 28, 2017 we were notified by Eide Bailly of its decision to resign as our independent registered public accounting firm. The reports of Eide Bailly on our consolidated financial statements for the fiscal years ended December 31, 2016 and 2015 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. 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.
In December the audit committee of the Company’s board of directors appointed M&K CPAs, PLLC (“M&K”) as its independent registered public accounting firm for the year ending December 31, 2017. The company signed an engagement letter with M&K on December 4, 2017. The Company has considered whether the provisions of audit services are compatible with maintaining M&K’s independence and concluded that M&K is independent. The audit committee has approved all of Eide Bailly’s and M&K’s fees.
The following table represents aggregate fees billed to us by Eide Bailly during 2018 and 2017.
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Audit Fees | - | $ | 82,863 | |||||
| Tax Fees | - | - | ||||||
| Other Fees | - | - | ||||||
The following table represents aggregate fees billed to us by M&K CPAs LLP during 2018 and 2017.
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Audit Fees | $ | 46,100 | $ | 37,000 | ||||
| Tax Fees | - | - | ||||||
| Other Fees | - | - | ||||||
| Two Rivers Water & Farming Company | 2018 Financials | Page 35 |
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following is a complete list of exhibits filed as part of this Form 10-K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
| Two Rivers Water & Farming Company | 2018 Financials | Page 36 |
| Two Rivers Water & Farming Company | 2018 Financials | Page 37 |
| † | Management contract or compensatory plan or arrangement. |
| * | The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Two Rivers Water & Farming Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the filing date of this Form 10-K, irrespective of any general incorporation language contained in such filing. |
| Two Rivers Water & Farming Company | 2018 Financials | Page 38 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: April 15, 2018 | Two Rivers Water & Farming Company |
| /s/ Wayne Harding | |
| Chief Executive Officer (Principal Executive Officer) & Chief Financial Officer (Principle Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: April 15, 2018 | |
| /s/ Wayne Harding | |
Wayne Harding President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board | |
| /s/ Thomas Williams | |
Thomas Williams Director | |
| /s/ James Kylstad | |
James Kylstad Director | |
| /s/ Layne Downs | |
Layne Downs Director |
| Two Rivers Water & Farming Company | 2018 Financials | Page 39 |
TABLE OF CONTENTS
FINANCIAL STATEMENTS
| Two Rivers Water & Farming Company | 2018 Financials | Page F-1 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Two Rivers Water & Farming Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Two Rivers Water & Farming Company (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company suffered a net loss from operations and negative cash flows from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2017.
Houston, TX
April 15, 2019
| Two Rivers Water & Farming Company | 2018 Financials | Page F-2 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for number of shares)
| December 31, 2018 | December 31, 2017 (Derived from Audit) | |||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 6 | $ | 14 | ||||
| Accounts receivable, net | - | 5 | ||||||
| Accounts receivable, related party | - | 19 | ||||||
| Deposits and other current assets | 58 | 32 | ||||||
| Total Current Assets | 64 | 70 | ||||||
| Long Term Assets: | ||||||||
| Property, equipment and software, net | 20 | 160 | ||||||
| Land | 3,299 | 3,505 | ||||||
| Water assets, net of impairments | 24,891 | 25,016 | ||||||
| Greenhouse & infrastructure, net | - | 5,955 | ||||||
| Construction in progress | - | 3,361 | ||||||
| Investment in GCP1 | 2,289 | - | ||||||
| Other long-term assets | 96 | 85 | ||||||
| Total Long-Term Assets | 30,595 | 38,082 | ||||||
| TOTAL ASSETS | $ | 30,659 | $ | 38,152 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,243 | $ | 1,553 | ||||
| Accrued liabilities | 5,780 | 1,837 | ||||||
| Current portion of notes payable, net of discount | 8,099 | 17,419 | ||||||
| Preferred dividend payable | 4,970 | 3,968 | ||||||
| Total Current Liabilities | 20,092 | 24,777 | ||||||
| Notes Payable, net of current portion | 1,173 | 1,238 | ||||||
| Total Liabilities | 21,265 | 26,015 | ||||||
| Commitments & Contingencies (Notes 4, 7, 9, 10) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized, 45,574,458 shares issued and outstanding at December 31, 2018 and 32,749,920 shares issued and outstanding at December 31, 2017 | 46 | 34 | ||||||
| Preferred shares, $0.001 par value, 5,000,000 shares authorized, 64,935 shares issued and outstanding at December 31, 2018 and December 31, 2017. | 252 | 252 | ||||||
| Additional paid-in capital | 81,186 | 77,267 | ||||||
| Accumulated (deficit) | (94,454 | ) | (97,168 | ) | ||||
| Total Two Rivers Water Company Shareholders’ Equity | (12,970 | ) | (19,615 | ) | ||||
| Noncontrolling interest in subsidiaries | 22,364 | 31,752 | ||||||
| Total Stockholders’ Equity | 9,394 | 12,137 | ||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 30,659 | $ | 38,152 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-3 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except for Profit (Loss) per Share)
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenue | ||||||||
| Leasing - Greenhouse | $ | - | $ | 620 | ||||
| Other | 66 | 72 | ||||||
| Total Revenue | 66 | 692 | ||||||
| Direct cost of revenue | - | (33 | ) | |||||
| Gross Margin | 66 | 659 | ||||||
| Operating Expenses: | ||||||||
| General and administrative | 2,970 | 2,409 | ||||||
Dam demolition expense | 1,800 | - | ||||||
Loss on equity offering | 1,632 | - | ||||||
| Asset impairment | - | 6,900 | ||||||
| Depreciation and amortization | 91 | 420 | ||||||
| Total operating expenses | 6,493 | 9,729 | ||||||
| Loss from Operations | (6,427 | ) | (9,070 | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | (980 | ) | (2,616 | ) | ||||
| Gain (loss) on disposal of assets | 238 | - | ||||||
| Loss on debt modification | (248 | ) | - | |||||
| Loss on debt conversions | (88 | ) | - | |||||
| Other income | 8 | 33 | ||||||
| Gain on de-consolidation of GrowCo | 12,773 | - | ||||||
| Loss on investment in GrowCo | (751 | ) | - | |||||
| Total other income (expense) | 10,952 | (2,583 | ) | |||||
| Net Profit (Loss) from Continuing Operations before Taxes | 4,525 | (11,653 | ) | |||||
| Income tax (provision) benefit | - | - | ||||||
| Net Profit (Loss) from Continuing Operations After Taxes | 4,525 | (11,653 | ) | |||||
| Net (Loss) from Deconsolidation and Discontinued Operations | (810 | ) | (1,045 | ) | ||||
| Net Profit (Loss) before Preferred Dividends and Non-Controlling Interest | 3,715 | (12,698 | ) | |||||
| Preferred distributions | (1,008 | ) | (863 | ) | ||||
| Net loss attributable to noncontrolling interest | 7 | 637 | ||||||
| Net Profit (Loss) Attributable to Common Shareholders | $ | 2,714 | $ | (12,924 | ) | |||
| Profit (Loss) Per Common Share - Basic | $ | 0.08 | $ | (0.40 | ) | |||
| Profit (Loss) Per Common Share - Dilutive | $ | 0.07 | $ | (0.40 | ) | |||
| Weighted Average Shares Outstanding: | ||||||||
| Basic | 35,139 | 32,118 | ||||||
| Dilutive | 37,408 | 32,118 | ||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-4 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net profit (loss), before NCI | $ | 2,707 | $ | (13,561 | ) | |||
| Net loss from discontinued operations | 810 | - | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation & Amortization | 91 | 421 | ||||||
| Accretion of debt discount | 250 | 469 | ||||||
| Asset impairment | - | 6,900 | ||||||
| (Loss)/Gain from debt extinguishment | 88 | (337 | ) | |||||
| Loss on modification of convertible debt | 248 | - | ||||||
| Stock issued for services | 1,668 | - | ||||||
| Stock Option and Warrant expense | 1,355 | 1,287 | ||||||
| Gain on deconsolidation | (12,773 | ) | - | |||||
| Loss on investment in GrowCo | 751 | - | ||||||
| Loss (Gain) on write down of assets related to property and equipment | - | - | ||||||
| Loss (Gain) from disposal of assets | (238 | ) | 387 | |||||
| Net change in operating assets and liabilities: | ||||||||
| Decrease in accounts receivable | 5 | 32 | ||||||
| Decrease in accounts receivable, related party | 2 | 221 | ||||||
| (Decrease) increase in deposits, prepaid expenses and other assets | (45 | ) | 25 | |||||
| Increase (decrease) in accounts payable | 222 | (619 | ) | |||||
| Increase in distribution payable to preferred shareholders | 1,008 | 863 | ||||||
| Increase in accrued liabilities and other | 2,791 | 1,014 | ||||||
| Net Cash Used in Operating Activities | (1,060 | ) | (2,898 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | - | - | ||||||
| Sale of property and equipment | 127 | 1,721 | ||||||
| Investment in water assets | (140 | ) | - | |||||
| Construction in progress | - | (506 | ) | |||||
| Net Cash (Used in) Provided Investing Activities | (13 | ) | 1,215 | |||||
| Cash Flows from Financing Activities: | ||||||||
| Preferred membership offerings | - | 93 | ||||||
| Proceeds from sale of preferred membership units | - | 252 | ||||||
| Proceeds from warrant exercises | - | 306 | ||||||
| Proceeds from debt | 1,607 | 2,456 | ||||||
| Payment on notes payable | (542 | ) | (1,560 | ) | ||||
| Net Cash Provided by Financing Activities | 1,065 | 1,547 | ||||||
| Net Increase in Cash & Cash Equivalents | (8 | ) | (136 | ) | ||||
| Beginning Cash & Cash Equivalents | 14 | 150 | ||||||
| Ending Cash & Cash Equivalents | $ | 6 | $ | 14 | ||||
Continued on next page
| Two Rivers Water & Farming Company | 2018 Financials | Page F-5 |
Continued from previous page
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest, net of $-0- and $122 respectively capitalized into CIP | $ | 203 | $ | 621 | ||||
| Conversion of debt, preferred shares into Two Rivers common stock | $ | 449 | $ | 464 | ||||
| Land Exchanged for debt | $ | 360 | $ | - | ||||
| Equipment Exchanged for debt | $ | - | $ | 287 | ||||
| Conversion of TR Cap into Two Rivers common shares | $ | 140 | $ | 70 | ||||
| Conversion of Accounts Payable into Water Redev preferred shares | $ | - | $ | 100 | ||||
| Beneficial conversion feature on convertible notes payable | $ | 82 | $ | - | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements
| Two Rivers Water & Farming Company | 2018 Financials | Page F-6 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2018 and 2017
(In thousands)
| Voting
Common Stock | WRC
Preferred | Additional Paid-in | Accumulated | Non- Controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Interest | Equity | |||||||||||||||||||||||||
| Balances, December 31, 2016 | 30,452 | $ | 31 | - | - | $ | 75,142 | $ | (84,244 | ) | $ | 32,366 | $ | 23,295 | ||||||||||||||||||
| Net Income (Loss) attributed to Two Rivers common shareholders | - | - | - | - | - | (12,924 | ) | - | (12,924 | ) | ||||||||||||||||||||||
| TR Cap Warrant Exchanges | 1,417 | 1 | - | - | 305 | - | - | 306 | ||||||||||||||||||||||||
| RSU Issuance | 139 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Shares issued for TR Capital conversions | 52 | - | - | - | 70 | - | (70 | ) | - | |||||||||||||||||||||||
| Stock Based Compensation | - | - | - | - | 796 | - | - | 796 | ||||||||||||||||||||||||
| Water Redevelopment Company preferred offering | - | - | 65 | 252 | - | - | - | 252 | ||||||||||||||||||||||||
| Stock issued in exchange for debt settlement | 665 | 1 | - | - | 464 | - | - | 465 | ||||||||||||||||||||||||
| Non-controlling interest | - | - | - | - | - | - | (637 | ) | (637 | ) | ||||||||||||||||||||||
| Shares issued for services | 25 | 1 | - | - | 150 | - | - | 151 | ||||||||||||||||||||||||
| Warrants issued for debt | - | - | - | - | 331 | - | - | 331 | ||||||||||||||||||||||||
| GrowCo Shares issued to directors | - | - | - | - | 9 | - | - | 9 | ||||||||||||||||||||||||
| GrowCo SuperUnits | - | - | - | - | - | - | 93 | 93 | ||||||||||||||||||||||||
| Balances, December 31, 2017 | 32,750 | $ | 34 | 65 | $ | 252 | $ | 77,267 | $ | (97,168 | ) | $ | 31,752 | $ | 12,137 | |||||||||||||||||
Continued on next page
| Two Rivers Water & Farming Company | 2018 Financials | Page F-7 |
Continued from previous page
| Voting
Common Stock | WRC
Preferred | Additional Paid-in | Accumulated | Non- Controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Interest | Equity | |||||||||||||||||||||||||
| Balances, December 31, 2017 | 32,750 | $ | 34 | 65 | $ | 252 | $ | 77,267 | $ | (97,168 | ) | $ | 31,752 | $ | 12,137 | |||||||||||||||||
| Net Income attributed to Two Rivers common shareholders | - | - | - | - | - | 2,714 | - | 2,714 | ||||||||||||||||||||||||
| Prior period adjustment preferred shares | - | - | - | - | (100 | ) | - | - | (100 | ) | ||||||||||||||||||||||
| Stock issued in exchange for debt settlement | 4,446 | 5 | - | - | 533 | - | - | 538 | ||||||||||||||||||||||||
| Beneficial conversion feature on convertible debt | - | - | - | - | 82 | - | - | 82 | ||||||||||||||||||||||||
| Loss on modification of convertible debt | - | - | - | - | 248 | - | - | 248 | ||||||||||||||||||||||||
| Stock issued as stock loan | 6,800 | 7 | - | - | 1,625 | - | - | 1,632 | ||||||||||||||||||||||||
| Shares issued for TR Capital conversions | 155 | - | - | - | 140 | - | (140 | ) | - | |||||||||||||||||||||||
| Stock Based Compensation | - | - | - | - | 1,306 | - | - | 1,306 | ||||||||||||||||||||||||
| Shares issued for services | 1,306 | - | - | - | 36 | - | - | 36 | ||||||||||||||||||||||||
| RSU issuance | 118 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Warrant issuance | - | - | - | - | 49 | - | - | 49 | ||||||||||||||||||||||||
| GrowCo deconsolidation | - | - | - | - | - | - | (9,241 | ) | (9,241 | ) | ||||||||||||||||||||||
| Non-controlling interest | - | - | - | - | - | - | (7 | ) | (7 | ) | ||||||||||||||||||||||
| Balances, December 31, 2018 | 45,575 | $ | 46 | 65 | $ | 252 | $ | 81,186 | $ | (94,454 | ) | $ | 22,364 | $ | 9,394 | |||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-8 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2018 and 2017
NOTE 1 – ORGANIZATION AND BUSINESS
The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to “Two Rivers,” or the “Company” is to Two Rivers Water & Farming Company and its subsidiaries.
Corporate Evolution
Prior to 2009, the Company was named Navidec Financial Services, Inc. (“Navidec”) and had been engaged in mortgage lending and other enterprises unrelated to its current lines of business. Navidec was incorporated in the state of Colorado on December 20, 2002. On July 28, 2009, Navidec formed a wholly-owned Colorado corporation for the purpose of acquiring farm and water assets in the Colorado Huerfano/Cucharas watershed. On November 19, 2009, with shareholder approval, Navidec changed its name to Two Rivers Water Company. On December 11, 2012, with shareholder approval, the Company changed its name to Two Rivers Water & Farming Company.
On January 29, 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations. We formed a new company, TR Capital Partners, LLC or TR Capital, which issued all of its common units to Two Rivers Water & Farming Capital. TR Capital then initiated the transactions described below under “Placement of Preferred Units”. Following the completion of those transactions in September 2014, TR Capital and our other direct and indirect subsidiaries (excluding HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company) entered into a series of related transactions as the result of which assets and operations of such other subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates all of the operations formerly conducted by those subsidiaries.
Overview
In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of September 30, 2018, we own 6,430 gross acres. Gross acres owned decreased from 6,538 gross acres at December 31, 2017 due to the sale of 108 acres.
We are focused on water assets we have acquired and will potentially acquire in the future. Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus our name Two Rivers Water Farming & Water Company. Our water assets are located in a basin that spans over 1,500 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors.
Since October 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest. We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest strategically in the assets that will. We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’ common shareholders. As of March 31, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000, or 29.12%. The reported outstanding shares were provided to the Company by GrowCo’s management.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-9 |
The Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July 17, 2018 the Company was notified by GrowCo’s management that GrowCo will not provide the requested financial information. This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities is no longer required under US GAAP.
Water Redevelopment Company
We formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets from the rest of our business and to enable additional raising of capital for the purpose of investing in our water assets. Water Redevelopment Company is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management and delivery. Water is one of the most basic, core assets. Water Redevelopment’s first area of focus is in the Huerfano-Cucharas river basin in southeastern Colorado.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company, TR Capital and its subsidaries: Two Rivers Farms, and Two Rivers Water. All significant inter-company balances and transactions have been eliminated in consolidation.
Under guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended June 30, 2018, GrowCo and its related entities were consolidated. Once it was determined to no longer consolidate GrowCo and its related entities, deconsolidation accounting was performed.
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.
Deconsolidation of GrowCo, Inc.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally, US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a. The aggregate of all of the following:
1. The fair value of any consideration received. In Two Rivers case, no consideration was received.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-10 |
2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were no retained noncontrolling investments in GrowCo or its related entities.
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
| Entity | April 1, 2018 | |||
| GrowCo | (1,230,000 | ) | ||
| GrowCo Partners 1, LLC | 3,621,000 | |||
| GCP Super Units, LLC | 5,016,000 | |||
| TR Cap 20150630 Distribution, LLC | 497,000 | |||
| TR Cap 20150930 Distribution, LLC | 460,000 | |||
| TR Cap 20151231 Distribution, LLC | 495,000 | |||
| Total | $ | 8,859,000 | ||
b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s assets.
Investment in GrowCo Partners 1, LLC (GCP1)
Due to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted for under the equity method. As of December 31, 2018, Two Rivers owns 34.56% of GCP1. For the year ended December 31, 2018, the Company recognized a $115,000 loss which also reduced the Company’s carrying value in its GCP1 investment.
Non-controlling Interest
Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
| Entity | Dec 31, 2018 | Dec 31, 2017 | ||||||
| TR Capital | $ | 20,342,000 | $ | 20,482,000 | ||||
| HCIC | 1,379,000 | 1,388,000 | ||||||
| F-1 | 29,000 | 29,000 | ||||||
| F-2 | 162,000 | 162,000 | ||||||
| DFP | 452,000 | 452,000 | ||||||
| GrowCo | - | (850,000 | ) | |||||
| GrowCo Partners 1, LLC | - | 3,621,000 | ||||||
| GCP Super Units, LLC | - | 5,016,000 | ||||||
| TR Cap 20150630 Distribution, LLC | - | 497,000 | ||||||
| TR Cap 20150930 Distribution, LLC | - | 460,000 | ||||||
| TR Cap 20151231 Distribution, LLC | - | 495,000 | ||||||
| Total | $ | 22,364,000 | $ | 31,752,000 | ||||
During the year ended December 31, 2014, investors in Two Rivers Farms F-1 (convertible notes and preferred shares), Two Rivers Farms F-2 (convertible notes and preferred shares), the Company’s preferred shares, ASF convertible notes, DFP preferred shares, Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners, LLC and were issued 30,159,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-11 |
The 30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20, Debt (and other convertible instruments with beneficial convertible features (“BCF”), the Company determined that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000 were recorded for the year ended December 31, 2014.
Two Rivers also formed three LLC special entities (TR Cap 20150630, Distribution, TR Cap 20150930 Distribution and TR Cap 20151231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership units.
Below is the breakdown of the non-controlling interest share of gains (losses):
| Entity | Year ended December 31, | |||||||
| 2018 | 2017 | |||||||
| TR Capital | $ | - | $ | - | ||||
| HCIC (1) | 7,000 | 7,000 | ||||||
| F-1 (2) | - | - | ||||||
| F-2 (2) | - | - | ||||||
| DFP (2) | - | - | ||||||
| GrowCo | - | (644,000 | ) | |||||
| GrowCo Partners 1, LLC | - | - | ||||||
| GCP Super Units, LLC | - | - | ||||||
| TR Cap 20150630 Distribution, LLC | - | - | ||||||
| TR Cap 20150930 Distribution, LLC | - | - | ||||||
| TR Cap 20151231 Distribution, LLC | - | - | ||||||
| Water Redevelopment | - | - | ||||||
| Totals | $ | 7,000 | $ | (637,000 | ) | |||
| Notes: | ||
| (1) | The Company owns 95% of HCIC. | |
| (2) | The terms of the preferred shares in each subsidiary allows for a participatory additional preferred share dividend of 25% of the profits derived from the assets held by the subsidiary. This participatory dividend, if any, will be recorded as a non-controlling share of the income. | |
Reclassification
Certain amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications have been changed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, Two Rivers Water & Farming Company considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial instruments.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-12 |
Concentration of Credit Risk
Financial instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, marketable investments, advances and accounts receivable. The Company maintains its cash balances in the form of bank demand deposits, money market accounts that management believes to be of high credit quality. Accounts receivable are typically uncollateralized and are derived from transactions with and from customers primarily located in the United States.
Fair Value of Measurements and Disclosures
Fair Value of Assets and Liabilities Acquired
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market in an orderly transaction between market participants. In determining fair value, the accounting standards established a three-level hierarchy that distinguishes between (i) market data obtained or developed from independent sources (i.e., observable data inputs) and (ii) a reporting entity’s own data and assumptions that market participants would use in pricing an asset or liability (i.e., unobservable data inputs). Financial assets and financial liabilities measured and reported at fair value are classified in one of the following categories, in order of priority of observability and objectivity of pricing inputs:
| ● | Level 1 – Fair value based on quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 – Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data. | |
| ● | Level 3 – Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in pricing the asset or liability. |
The fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
Recurring Fair Value Measurements
The carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value. The carrying value of cash held as demand deposits, money market and certificates of deposit, marketable investments, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. Marketable investments are valued at Level 1 due to readily available market quotes. The fair value of the Company’s long-term debt, including the current portion approximated its carrying value. Fair value for long-term debt was estimated based on quoted market prices of the identical debt instruments or values of comparable borrowings.
Accounts Receivable, Related Party
The Company carries its accounts receivable, net at management’s expectation of collection and past experience. As of December 31, 2018, and 2017, the Company did not have an allowance for doubtful accounts receivable based on past payment performance. The Accounts Receivable, Related Party for December 31, 2017, reflects amounts owed from an entity controlled by our prior CEO.
Capitalization of Interest
As of December 31, 2017, $897,000 in notes payable interest has been capitalized in the construction of greenhouse 1 and 2. There was no capitalization of interest during the year ended December 31, 2018.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-13 |
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to twenty-seven and a half years. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Below is a summary of property and equipment:
| Asset Type | Life in Years | Dec 31, 2018 | Dec 31, 2017 | |||||||||
| Office equipment, furniture | 5 – 7 | $ | 12,000 | $ | 12,000 | |||||||
| Computers | 3 | 46,000 | 46,000 | |||||||||
| Vehicles | 5 | 25,000 | 92,000 | |||||||||
| Farm equipment | 7 – 10 | 147,000 | 244,000 | |||||||||
| Buildings | 27.5 | 10,000 | 10,000 | |||||||||
| Website | 3 | 7,000 | 7,000 | |||||||||
| Subtotal | 247,000 | 411,000 | ||||||||||
| Less: Accumulated depreciation | (227,000 | ) | (251,000 | ) | ||||||||
| Net book value | $ | 20,000 | $ | 160,000 | ||||||||
Land
Land acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore, additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land (Property and Equipment above). Land is not depreciated. However, once per year, management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.
The Company’s land located in El Paso County, Colorado is being partially developed into 35 to 40 acre lots to be sold. For the year ended December 31, 2018 the Company recognized a gain of $238,000 from approximately $360,000 in land sales.
Water rights and infrastructure
Subsequent to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. No amortization or depreciation is taken on the water rights. See the discussion below concerning Impairments – Water rights and infrastructure.
Intangibles
Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in HCIC and Orlando. These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado.
Impairments
Property and Equipment
Once per year we review all property, equipment and software owned by the Company and compared the net book value of such assets with the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value of the affected asset will be recorded, and the impairment will not be reversed in future periods.
Land
Once per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-14 |
Water rights and infrastructure
Once per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not be reversed in future periods.
Prior to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis caused the recognition of $6,900,000 impairment to the water infrastructure.
In 2018 the Company obtained two independent appraisals covering its water assets. The appraisals were in excess of the Company’s carrying value of it water rights and infrastructure.
Impairment of DFP Intangibles
In 2016, due to the discontinuance of DFP operations, we wrote off the full value of DFP intangibles (see Note 4).
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the twelve months ended December 31, 2018 and 2017.
Leasing Greenhouse
The lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainty of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
Farming
The Company had no revenues from farming for the year ended December 31, 2017. For the year ended December 31, 2018, the Company recognized approximately $18,000 in net crop share revenues. During 2018, the Company entered into a crop share arrangement for a percentage of a hemp crop produced on 4 acres of farm land at Butte Valley in Huerfano County, Colorado. A net payment of $18,000 for the Company’s share was received in the three months ended December 31, 2018.
Other
For the year ending December 31, 2018, the Company had approximately $48,000 in other revenues from grazing leases and member assessments. For the year ending December 31, 2017, the Company had approximately $72,000 in other revenues from grazing leases and member assessments.
Member Assessments
Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to HCIC are eliminated in consolidation of the financial statements.
HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments.
Stock Based Compensation
Beginning January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
All options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of adoption.
Debt and Equity
The Company accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt, and allocates proceeds received to the warrants based on relative fair values.
The Company also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company would recognize the BCF by allocating the intrinsic value of the conversion option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-15 |
Preferred Dividend payable
Preferred dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of December 31, 2018 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $33,000.
Beginning on July 1, 2018, the Company terminated the accrual of the preferred dividends payable to TR Capital preferred members due to a binding letter of intent executed with an outside strategic partner.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2018, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
Net Income (Loss) per Share
Basic net (loss) per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period.
The dilutive effect of the outstanding 3,058,500 options, and 17,537,896 warrants at December 31, 2018 and December 31, 2017, have an exercise price in excess of the Company’s closing price of $0.17/share as of December 28, 2018; therefore these shares have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive. However, during the quarter ending March 31, 2019, existing convertible debt was converted into 2,269,198 of the Company’s common shares. Therefore, these additional shares are added to the basic shares for the nine months ended December 31, 2018.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-16 |
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In July 2017, the FASB issued Accounting Standards Update (“ASU”) “Income Statement – Reporting Comprehensive Income (Topic 220)”. This ASU deals with the reclassification of certain tax effects from Accumulated Other Comprehensive Income. The Company does not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in the future it may have an impact on its financial statements with the adoption of this new accounting pronouncement.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
NOTE 3 – DISCONTINUED OPERATIONS (DFP) AND DECONSOLIDATION (GROWCO)
DFP
During the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided to sell all assets associated with this business due to the sustained losses incurred.
The loss from DFP discontinued operations presented in the statements of operations consist of the following for the year ended December 31, 2018 and December 31, 2017:
| December 31, 2018 | December 31, 2017 | |||||||
| Revenues | $ | - | $ | - | ||||
| Cost of goods sold | - | - | ||||||
| General and administrative expenses | - | (993,000 | ) | |||||
| Depreciation and amortization | - | (1,000 | ) | |||||
| Interest | - | (43,000 | ) | |||||
| Other (gain (loss) on disposal of assets and intangibles) | - | (8,000 | ) | |||||
| Total | $ | - | $ | (1,045,000 | ) | |||
| Two Rivers Water & Farming Company | 2018 Financials | Page F-17 |
On March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds from the auction were $1,740,000 with net proceeds estimated to be $1,583,000. Proceeds were used to pay off secured debt first with any residual proceeds used to pay unsecured debt.
GrowCo and related entities
According to ASC 810-10-40-4 Two Rivers shall deconsolidate a subsidiary or derecognize a group of assets as of the date the parent ceases to have a controlling financial interest in that subsidiary or group of assets. Management determined this date was April 1, 2018 to deconsolidate GrowCo and GrowCo’s related entities.
Further, a primary beneficiary’s financial statements (i.e., Two Rivers) should reflect the consolidation of a Variable Interest Entity (“VIE”) for each reporting period until it is not required to consolidate the VIE. That is, upon the occurrence of a deconsolidation event, it is appropriate for the primary beneficiary to assume the event had occurred in a prior reporting period to enhance the comparability of financial statements. However, the primary beneficiary should evaluate whether the deconsolidated entity qualifies for discontinued operations treatment pursuant to ASC 205-20.
Accoring to ASC 205-20 for disposals other than by sale (e.g., abandonment, distribution or exchange for similar productive assets), the results of operations of a component of an entity would not be recorded as a discontinued operation until the period in which the long-lived asset or disposal group is either abandoned, distributed or exchanged, depending on the manner of disposal.
Effective April 1, 2018, the Company is no longer consolidating the financials of GrowCo and its related entities. The effect of deconsolidation created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo deconsolidated operations of $810,000; broken down as follows:
| December 31, 2018 | December 31, 2017 | |||||||
| Revenues | $ | 52,000 | $ | - | ||||
| General and administrative expenses | (89,000 | ) | - | |||||
| Depreciation and amortization | (61,000 | ) | - | |||||
| Interest | (1,092,000 | ) | - | |||||
| Non-controlling interest | 380,000 | - | ||||||
| Total | $ | (810,000 | ) | $ | - | |||
NOTE 4 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon purchasing land, the value is recorded at the purchase price or fair value, whichever is more accurate. Costs incurred to prepare the land for the intended purpose, which is efficient irrigated farming, is also capitalized in the recorded cost of the land. No amortization or depreciation is taken on Land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for any potential impairments.
Water rights and infrastructure
The Company has acquired both direct flow water rights and water storage rights. We have obtained water rights through the purchase of shares in a mutual ditch company, which we did with our purchase of shares in HCIC, or through the purchase of an entity holding water rights, which we did with our purchase of the Orlando. The Company may also acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court and administered under the jurisdiction of the Office of the State Engineer.
Upon purchasing water rights, the value is recorded at our purchase price. If a majority interest is acquired in a company holding water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines the fair value of the assets. To assist with the valuation, the Company may consider reports from a third-party valuation firm. If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized. If the value of the water assets are less than what the Company paid then goodwill is recognized.
Subsequent to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there $6,930,000 in impairments on the Company’s land and water rights. No amortization or depreciation is taken on the water rights.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-18 |
Construction in progress – GrowCo
Due to the deconsolidation of GrowCo in 2018, the balance in GrowCo’s work in progress was eliminated.
| Year ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Beginning balance | $ | 3,361,000 | $ | 3,520,000 | ||||
| Additions | - | 506,000 | ||||||
| Finished and Transferred | - | (665,000 | ) | |||||
| Deconsolidation of GrowCo | $ | (3,361,000 | ) | - | ||||
| Ending Balance | $ | - | $ | 3,361,000 | ||||
NOTE 5 – NOTES PAYABLE
The Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method which, in this situation, equals a straight-line method. For the years ended December 31, 2018 and 2017, the Company recognized an accretion of debt discount of $250,000 and $469,000, respectively.
For the year ended December 31, 2018 to Company recognized a loss of approximately $248,000 related to debt modification and extinguishment.
HCIC Seller Carry Back Notes
Beginning on September 17, 2009, Two Rivers began acquiring shares in HCIC and related land from a HCIC shareholder. As part of these acquisitions, many of the sellers financed notes payable with Two Rivers and HCIC. As of December 31, 2012, these loans totaled $7,364,000. The notes carry interest at 6% per annum, interest payable monthly, the principal amounts were due at various dates from March 31, 2013 through September 30, 2016 and are collateralized by HCIC share.
In June 2013, the Company negotiated an extension on holders representing $6,164,000 of the seller carry back notes. Previously these amounts were due either August or September 2013. The holders of the notes agreed to extend the due date to June 30, 2016. In exchange for this extension, the Company increased the principal balance by 20% from $6,164,000 to $7,397,000, paid 5.43% against the principal and agreed to begin paying monthly interest and principal at a 20-year amortization rate.
In May 2016, the Company negotiated another extension on holders representing $5,214,000 to extend the due date from June 30, 2016 to June 30, 2019. The extension reset the amortization period to 12 years, kept interest at 6% per year, and called for a 5% principal reduction in February 2017. Payments to all of the HCIC note holders are behind. The Company is in technical default on $6,323,000 of the HCIC carry back notes due to non-payment of interest and principle. Consequently, the entire amount of the notes has been classified as current.
For the year ended December 31, 2017, holders representing $3,181,000 of the notes held conversion rights into the Company’s common shares at $1.00 to $1.25. These conversions were cancelled and replaced by 5-year warrants at $3.00 per share. A total of 1,367,000 warrants were issued. The warrants issued had a fair value of $277,000 using the Black Scholes method of fair value determination.
Beginning in the fourth quarter of 2018, and still continuing, the Company is working with a third party interested in assuming the entire HCIC Seller Carry Back Notes along with all accrued interest. This third party has obtained non-binding letters of interest from the majority of the current HCIC Seller Carry Back Notes.
Colorado Water Conservation Loan (“CWCB”)
On March 5, 2012, the Company closed long-term financing with the Colorado Department of Natural Resources, Colorado Water Conservation Board in the amount of $1,185,000 (the “CWCB Loan”). This loan partially financed the rehabilitation of the Cucharas Reservoir to temporarily bring it into safety compliance with the Colorado State Engineers office. Further, the CWCB Loan assisted with the rehabilitation of the Orlando facilities through the installation of a new outlet gate/pipe. There was a $12,000 service fee due upon closing. This amount is being amortized over the expected life of the CWCB Loan, which is 20 years with interest fixed at 2.5% per annum. During the year ended December 31, 2016, the Company paid an additional $210,000 toward the CWCB Loan principal in order to release CWCB’s lien on 157 acres being used to build GrowCo greenhouses. As of December 31, 2018, and 2017, the amounts outstanding under the CWCB Loan totaled $690,000 and $748,000, respectively.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-19 |
McFinney Agri-Finance LLC (McFinney) and Ellicot Second Mortgage (Ellicot)
On March 15, 2013, the Company purchased unimproved land in El Paso county, Colorado for a purchase price of $1,250,000. The company paid $620,000 (including closing costs and allocations) and financed $650,000 McFinney and $400,000 Ellicot, through private investors.
The terms of the McFinney financing is for monthly payments of principal and interest of $4,238 per month, a fixed interest rate of 6.8% per annum, with the remaining principal due on April 1, 2018, which was subsequently extended to April 1, 2019. The note is secured by a deed of trust on the 2,579 acres of land purchased and a guaranty of payment by the Company. As of December 31, 2018 the amount owed was $60,000. This note was paid in full on April 4, 2019.
On April 4, 2019, the principal and interest was paid in full.
GrowCo Note
On September 16, 2016, the Company entered into a note with GrowCo, Inc. based on calculations of amounts due to GrowCo based on GrowCo overpaying overhead of Two Rivers for GrowCo funds. It was due December 31, 2018. The amount is being disputed by GrowCo along with the requested interest. The Company has recognized a balance due of $390,000. The note states interest at 6%, but GrowCo is requesting interest at 22.5%. As of December 31, 2018, the Company has recognize a balance due of $390,000. Management of Two Rivers and GrowCo are in ongoing discussions to determine the amount owed and the interest rate charged.
Powderhorn/Silverback Note
During the three months ended December 31, 2018, the Powderhorn Note was sold to Silverback Securities, by Powderhorn, with no financial impact on the Company nor changes to the note. The remaining payments on this note was paid through the issuance of 2,196,154 of the Company’s common shares and recognized a beneficial conversion expense of approximately $12,000. As of December 31, 2018, the balance is approximately $203,000 and recognized an approximate $248,000 loss due a modification to the Powderhorn Note. As of March 31, 2019 this note was paid in full.
Morningview Financial Convertible Note
On May 4, 2018 the Company entered into a convertible promissory note with Morningview Financial, LLC (“Morningview”) for $105,000. After November 4, 2018, if the note remains outstanding, Morningview has the right to convert its note at a variable conversion price which is 60% of the Company’s common shares lowest market price during a prior 15-day trading period. Company issued 475,452 shares to pay this note and recognized a beneficial conversion expense of approximately $70,000. As of March 31, 2019, this note was paid in full.
El Paso Land Notes
In August 2017, the Company borrowed $275,000 pledging a second lien on property the Company owns in El Paso County Colorado. This loan pays 18%/annum interest and is to be repaid through the sale of 35 to 40 acre lots. The repayment is based on 25% of the net proceeds from sales. For the year ended December 31, 2018, approximately $6,000 was paid on these notes. As of December 31, 2018, the balance is approximately $269,000. The stated maturity date is August 1, 2019. Mr. Wayne Harding, the Company’s CEO, invested $50,000 in these notes.
WRC Convertible Note
For the year ended December 31, 2017, Water Redevelopment Company (WRC) issued convertible notes which are due note April 1, 2020. It carries interest at 12% per annum and is secured by a security interest in the water supply agreement between the Company and a real estate developer in the area of the Orlando/Butte Valley facilities. This note, at the option of the holder, can be converted into one share of WRC preferred shares for each $4.23 of principal balance and accrued interest. There was no beneficial conversion expense recognmized. At December 31, 2018, the principle balance was $500,000.
Butte Valley Land Notes
In May 2018 the Company enter into a $200,000 note with an existing investor to provide working capital funds. This note is secured by certain land owned by the Company referred to Butte Valley (located in Huerfano County, Colorado). Under the terms of this note, 50% of the crop share income payable to the Company from crop share arrangements would be paid to the investor as a payment toward interest and principle due. The Company received permission from the note holder to not make the crop share payment in 2018. This note was due on November 11, 2018. The Company is in the process of obtaining an extension to the due date. As of December 31, 2019, the principla balance was $200,000.
Black Mountain Note
This note was entered into on April 26, 2017. It is an original issuance discount note with the face principal amount of $330,000 and gross cash paid at closing of $300,000. In the three months ended December 31, 2018 this note was paid in full. During the year ended December 31, 2018, the Company issued 900,000 of its common shares and recorded a loss of approximately $89,000 on the debt extinguishment.
Investors Fiduciary LLC
On July 23, 2018, the Company entered into a convertible promissory note with Investors Fiduciary LLC (and related parties) for a bridge loan up to $2,000,000. As of December 31, 2018, $551,000 has been drawn on this note. The note carries interest at 20% per annum and is secured by the Company’s unencumbered 2,456.5 shares in the Huerfano Cucharas Irrigation Company. The holder has a right to convert principal and any accrued interest into the Company’s common shares at a rate of $0.14/share. On July 23, 2018, the Company’s common stock closed at $0.117/share. Therefore, the Company did not record a beneficial conversion feature.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-20 |
Below is a summary of the Company’s long-term debt:
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||
| Note | Principal Balance | Accrued Interest | Discount | Principal Balance | Interest rate | Security | ||||||||||||||||
| HCIC seller carry back | $ | 6,323,000 | $ | 742,000 | $ | - | $ | 6,301,000 | 6 | % | Shares in the Mutual Ditch Company | |||||||||||
| CWCB | 690,000 | - | - | 748,000 | 2.5 | % | Certain Orlando and Farmland assets | |||||||||||||||
| McFinney Agri-Finance | 60,000 | - | - | 441,000 | 6.8 | % | 2,400 acres of pasture land in Ellicott Colorado | |||||||||||||||
| GrowCo note | 390,000 | 12,000 | - | - | 6 | % | None | |||||||||||||||
| GrowCo $4M notes | - | - | - | 4,000,000 | 22.5 | % | Various land and water assets | |||||||||||||||
| GrowCo $1.5M exchange note | - | - | - | 100,000 | 22.5 | % | Various land and water assets | |||||||||||||||
| GrowCo $6M exchange note | - | - | - | 1,855,000 | 22.5 | % | ||||||||||||||||
| GrowCo $7M exchange note | - | - | - | 3,132,000 | 10-22.5 | % | ||||||||||||||||
| GrowCo $2M exchange note | - | - | - | 1,520,000 | 10-22.5 | % | ||||||||||||||||
| Bridge loan Harding | 15,000 | - | - | 13,000 | 18 | % | Potential conversion into Ellicott Land security | |||||||||||||||
| Powderhorn/Silverback convertible note | 203,000 | 2,000 | (13,000 | ) | - | 12 | % | Third lien on Ellicott land | ||||||||||||||
| Morningview Financial note | 75,000 | 7,000 | (50,000 | ) | - | 18.0 | % | Unsecured | ||||||||||||||
| El Paso Land notes | 271,000 | 56,000 | - | 275,000 | 12.0 | % | Second lien on Ellicott land | |||||||||||||||
| WRC convertible notes | 500,000 | 67,000 | - | 300,000 | 12.0 | % | Lien on water supply agreement | |||||||||||||||
| Butte Valley Land notes | 200,000 | 47,000 | - | - | 18 | % | Butte Valley Land | |||||||||||||||
| Equipment loans | 57,000 | 3,000 | - | 122,000 | 5 - 8 | % | Equipment | |||||||||||||||
| Black Mountain | - | - | - | 300,000 | 12 | % | Unsecured | |||||||||||||||
| Investors Fiduciary LLC | 551,000 | 32,000 | - | - | - | Shares of HCIC | ||||||||||||||||
| Total | 9,335,000 | $ | 968,000 | $ | (63,000 | ) | 19,107,000 | |||||||||||||||
| Less: note discounts | (63,000 | ) | (450,000 | ) | ||||||||||||||||||
| Less: Current portion net of discount | (8,099,000 | ) | (17,419,000 | ) | ||||||||||||||||||
| Long term portion | $ | 1,173,000 | $ | 1,238,000 | ||||||||||||||||||
| Two Rivers Water & Farming Company | 2018 Financials | Page F-21 |
| Current portion long term debt: | December 31, 2018 | |||
| HCIC seller carry back | $ | 6,323,000 | ||
| CWCB | 54,000 | |||
| McFinney Agri-Finance | 60,000 | |||
| Harding Bridge Loan | 15,000 | |||
| Powderhorn note | 203,000 | |||
| Morningview note | 75,000 | |||
GrowCo note | 390,000 | |||
| Investor Land notes | 271,000 | |||
| Equipment loans | 20,000 | |||
Butte Valley Land notes | 200,000 | |||
| Investors Fiduciary notes | 551,000 | |||
| Total | 8,162,000 | |||
| Less discount | (63,000 | ) | ||
| $ | 8,099,000 | |||
Schedule of principal payment due by year:
| Year Ending December 31, | Total | |||
| 2019 | $ | 8,162,000 | ||
| 2020 | 576,000 | |||
| 2021 | 75,000 | |||
| 2022 | 61,000 | |||
| 2023 & Beyond | 461,000 | |||
| Total | $ | 9,335,000 | ||
NOTE 6 – INFORMATION ON BUSINESS SEGMENTS
We organize our business segments based on the nature of the products and services offered. Currently, we focus on the Farms and Water business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of businesses: Farms and Water. Water contains our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations may differ from those on the face of the income statement. In 2017, the pior farming operations were discontinued; however, we we continue to report with a Farming Business since we are expanding our farming business in 2019.
In the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate, to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments, and these expenses are contained in the “Total Operating Expenses” under Parent.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-22 |
Operating results for each of the segments of the Company are as follows (in thousands):
| Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||||||||||
| Parent | Farms | Green- house | Water | Total | Parent | Farms | Green- house | Water | Total | |||||||||||||||||||||||||||||||
| Revenue | $ | 18 | $ | - | $ | - | $ | 48 | $ | 66 | $ | - | $ | - | $ | 620 | $ | 72 | $ | 692 | ||||||||||||||||||||
| Less: direct cost of revenue | - | - | - | - | - | - | - | - | 33 | 33 | ||||||||||||||||||||||||||||||
| Gross Margin | 18 | - | - | 48 | 66 | - | - | 620 | 39 | 659 | ||||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Total Operating Expenses | (2,873 | ) | - | - | (3,620 | ) | (6,493 | ) | (752 | ) | - | (501 | ) | (8,145 | ) | (9,398 | ) | |||||||||||||||||||||||
| Total Other Income (Expense) | 11,470 | - | - | (518 | ) | 10,952 | (530 | ) | - | (2,016 | ) | (368 | ) | (2,914 | ) | |||||||||||||||||||||||||
| Net (Loss) from Operations Before Income Taxes | 8,615 | - | - | (4,090 | ) | 4,525 | (1,282 | ) | - | (1,897 | ) | (8,474 | ) | (11,653 | ) | |||||||||||||||||||||||||
| Income Taxes (Expense)/Credit | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Net (Loss) from Operations | 8,615 | - | - | (4,090 | ) | 4,525 | (1,282 | ) | - | (1,897 | ) | (8,474 | ) | (11,653 | ) | |||||||||||||||||||||||||
| Net (Loss) from Discontinued Operations | - | - | (810 | ) | - | (810 | ) | - | (1,045 | ) | - | - | 1,045 | ) | ||||||||||||||||||||||||||
| Preferred dividends | (986 | ) | - | - | (22 | ) | (1,008 | ) | (369 | ) | - | (478 | ) | (16 | ) | (863 | ) | |||||||||||||||||||||||
| Non-controlling interest | 7 | - | - | - | 7 | - | - | 644 | (7 | ) | 637 | |||||||||||||||||||||||||||||
| Net (Loss) | $ | 7,636 | $ | - | $ | (810 | ) | $ | (4,112 | ) | $ | 2,714 | $ | (1,651 | ) | $ | (1,045 | ) | $ | (1,731 | ) | $ | (8,497 | ) | $ | (12,924 | ) | |||||||||||||
| Segment Assets | $ | 10,530 | $ | - | $ | - | $ | 20,129 | $ | 30,659 | $ | 766 | $ | - | $ | 9,433 | $ | 27,953 | $ | 38,152 | ||||||||||||||||||||
| Two Rivers Water & Farming Company | 2018 Financials | Page F-23 |
NOTE 7 - EQUITY TRANSACTIONS
Common Stock
The Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of December 31, 2018, was 45,574,458 common shares.
During the year ended December 31, 2018, Two Rivers had the following common stock transactions:
| ● | 874,250 common stock to Black Mountain for a $100,000 in principal reduction in its note payable and the Company recognized a loss of approximately $29,000. | |
| ● | 1,090,957 common stock issued to Spotfin Funding for financial services. These shares issued were expensed in the previous year. | |
| ● | 14,840 common stock issued for a conversion from TR Capital into the Company’s common shares. These shares issued were expensed in the previous year. | |
| ● | 118,000 common stock issued for a RSU exercise. The RSU expense was recognized in a previous year. | |
| ● | 6,800,000 common stock issued for potential equity loans to be made in 2019. Since it is anticipated that the loans will not be fund, the fair value of the 6,800,000 shares issued upon the closing price at issuance at $0.247/share, $1,632,000 has been expensed. | |
| ● | 2,196,154 common stock issued to Powderhorn/Silverback Securities for a partial payment on convertible debt. No loss on conversion was recognized as converted within the terms of the note agreement. A loss of approximately $248,000 was recognized due to the note modification. | |
| ● | 900,000 common stock issued to Black Mountain for the final payment of approximately $138,000 on its note payable. A loss of approximately $60,000 was recognized. | |
| ● | 475,452 common stock issued to Morningview for a principal reduction in its note payable. There was no gain or loss recognized. | |
| ● | 14,900 common stock issued to three individuals assisting with investor relations. An expense of approximately $2,000 was recognized. | |
| ● | 200,000 common stock issued to an investor relations firm. An expense of $34,000 was recognized. | |
| ● | 139,985 common stock issued to an investor for his conversion from TR Capital Partners, LLC. No gain or loss was recognized. |
During the year ended December 31, 2017, Two Rivers had the following common stock transactions:
| ● | issued 1,417,000 shares for early warrant exercises; | |
| ● | issued 52,260 shares for conversions by TR Capital preferred units; | |
| ● | issued 25,200 shares for investor relations services; | |
| ● | issued 139,000 from an RSU exercise, and | |
| ● | issued 665,000 shares in exchange for debt. |
Stock Incentive Plans
The Company previously had a 2005 Stock Option Plan (“2005 Plan”) that was superseded by the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”). Upon the Company’s shareholder adoption of the 2011 Plan, the 2005 Plan stopped issuance of any further grants, except for grants previously committed by agreement.
Under the 2005 Plan, we have the following stock options issued and outstanding:
| Company Relationship | Options | Date of Grant | Vesting Date | Performance Requirement | Expiration Date | Exercise Price | Exercised to Date | |||||||||||||
| Consultant | 600,000 | Various | Various | Satisfied | Various | $ | 0.70 | - | ||||||||||||
There were no options issued under the 2005 Plan for the years ending December 31, 2018 and 2017.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-24 |
A summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding December 21, 2016 | 1,989,867 | $ | 1.25 | |||||
| Granted (1) | 600,000 | 0.70 | ||||||
| Cancelled (1) | (600,000 | ) | 1.25 | |||||
| Expired | (1,389,867 | ) | 1.25 | |||||
| Exercised | - | - | ||||||
| Outstanding December 31, 2017 | 600,000 | 0.70 | ||||||
| Granted | - | - | ||||||
| Cancelled | - | - | ||||||
| Expired | - | - | ||||||
| Exercised | - | - | ||||||
| Outstanding December 31, 2018 | 600,000 | $ | 0.70 | |||||
| Options Exercisable, December 31, 2018 | 600,000 | $ | 0.70 | |||||
Note (1): 600,000 options were extended and repriced from $1.25/share to $0.70/share
For the year ended December 31, 2017, the Company extended 600,000 options that were due to expire in 2016 and 2017 to expiration dates in 2018 and 2019. This extension resulted in $52,000 of expense being recorded in 2017.
For the year ended December 31, 2017, the Company extended the same 600,000 options and reset the strike price from $1.25/share to $0.70/share and extended the expiration to occur in 2021 and 2022. This extension resulted in $85,000 of expense being recorded in 2017.
Under the 2011 Plan, we have the following stock options issued and outstanding:
Company Relationship | Options | Date of Grant | Vesting Date | Performance Requirement | Expiration Date | Exercise Price | Exercised to Date | ||||||||||||
| CEO | 825,000 | Various | Various | Ongoing | 2026-2017 | Variable | - | ||||||||||||
| Directors - prior | 1,173,215 | Various | Various | Satisfied | Various | $ | 0.53 | - | |||||||||||
| Employees | 131,000 | Various | Various | Ongoing | Jun-’26 | $ | 0.53 | - | |||||||||||
| Others | 150,000 | Various | Various | Satisfied | Various | Variable | - | ||||||||||||
| Total | 2,279,215 | ||||||||||||||||||
Option Valuation Process
The fair value of each option award is estimated on the date of grant. To calculate the fair value of options, the Company uses the Black-Scholes model employing the following variables:
| 2018 | 2017 | |||||||
| Expected stock price volatility | 224 | % | 142 | % | ||||
| Risk-free interest rate | 1.3 | % | 0.83 | % | ||||
| Expected option life (years) | 5.00 | 5.00 | ||||||
| Expected annual dividend yield | 0 | % | 0 | % | ||||
The Company arrived at the foregoing estimate of volatility of the Company’s common stock based on the Company’s stock closing price on a weekly basis and averaged over the prior five years. The risk-free rate for periods within the expected term of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The Company believes these estimates and assumptions are reasonable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-25 |
A summary of the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”) is as follows:
| Shares | ||||
| Outstanding December 31, 2016 | 4,173,448 | |||
| Granted | 1,211,500 | |||
| Cancelled | (1,993,948 | ) | ||
| Expired | (25,000 | ) | ||
| Issued/Exercised | (118,500 | ) | ||
| Outstanding December 31, 2017 | 3,247,540 | |||
| Granted | - | |||
| Cancelled | (779,285 | ) | ||
| Expired | (178,500 | ) | ||
| Issued/Exercised | - | |||
| Outstanding December 31, 2018 | 2,289,755 | |||
| Exercisable, December 31, 2018 | 1,618,357 | |||
The option expense from both the 2011 and 2005 Plans were $888,000 and $467,000 for the years ended December 31, 2018 and 2017, respectively.
The Company can issue stock awards and options for nonemployee services. If stock is granted, the Company values the stock using an average of the closing price of the Company’s stock over the period that the service was rendered. If options are granted, the Company uses the Black-Scholes model for determining fair value (see above).
Warrants
As of December 31, 2018, the Company has outstanding the following warrants to purchase common stock:
| Grantee | Company Relationship | Shares | Date of Grant | Vesting Date | Expiration Date | Exercise Price | ||||||||||
| Investor Group | Investors | 300,000 | Feb-12 | Mar-12 | (1) | $ | 1.00 | |||||||||
TR Capital Partners preferred members | Investors | 14,168,944 | Jul-05 | Jul-05 | Jan-19 | $ | 2.10 | |||||||||
| GrowCo Exchange Note | Creditor | 700,000 | Apr-16 | Apr-16 | May-21 | $ | 0.50 | |||||||||
| Wellington Shields | Financial Advisor | 15,000 | Apr-17 | Apr-17 | Apr-22 | $ | 0.58 | |||||||||
| Black Mountain | Creditor | 390,634 | Apr-17 | Apr-17 | Apr-22 | $ | 0.27 | |||||||||
| El Paso Land note holders | Creditor | 275,000 | Aug-17 | Aug-17 | Aug-22 | $ | 0.35 | |||||||||
| Black Mountain | Creditor | 146,000 | Sep-17 | Sep-17 | Sep-22 | $ | 1.00 | |||||||||
| Wellington Shields (2) | Financial Advisor | 42,318 | Feb-18 | Feb-18 | Feb-23 | $ | 0.32 | |||||||||
| Powderhorn (3) | Creditor | 1,500,000 | May-18 | May-18 | May-21 | $ | 0.35 | |||||||||
| 17,537,896 | ||||||||||||||||
| (1) | These warrants are priced at the same price per share as the next equity offering and expire one year after the completion of the next equity offering. | |
| (2) | Wellington Shield warrants were issued for capital raise assistance. Using a Black Scholes model the expense was immaterial and not recorded. | |
| (3) | Powderhorn warrants were part of the loan received from Powderhorn. Using a Black Scholes model the expense was $229,000 which is amortized over a 3 year period. |
For the years ended December 31, 2018 and 2017, warrant expense totaled $50,000 and $331,000, respectively.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-26 |
NOTE 8 – INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act decreased the Company’s deferred tax asset related to the Company’s net operating loss by approximately $6,500,000 and decreased the Company’s valuation allowance by approximately $6,500,000 resulting in no impact to the Company’s financials.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.
Book loss reconciliation to estimated taxable income is as follows (in thousands):
| 2018 | 2017 | |||||||
| Book loss | $ | 2,714 | $ | (12,924 | ) | |||
| Tax adjustments: | ||||||||
| Stock based compensation | $ | 1,306 | $ | 956 | ||||
| Stock compensation exercised | $ | 32 | $ | - | ||||
| Impairments | $ | - | $ | 6,900 | ||||
| Capital expenses | $ | 2,964 | $ | 2,629 | ||||
| Meals & entertainment | $ | - | $ | - | ||||
| Warrant Expense | $ | 50 | $ | 331 | ||||
| Gain on deconsolidation of GrowCo | $ | (12,773 | ) | $ | - | |||
| Loss on disposal on debt modification | $ | 336 | $ | - | ||||
| Depreciation | $ | 91 | $ | (617 | ) | |||
| Amortization | $ | $ | (14 | ) | ||||
| Estimate of taxable income | $ | (5,280 | ) | $ | (4,425 | ) |
We will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. At December 31, 2018 and December 31, 2017, we had no unrecognized tax benefits in income tax expense.
Our income tax returns are no longer subject to Federal tax examinations by tax authorities for years before 2014 and state examinations for years before 2014.
The components of the deferred tax asset are as follows (in thousands):
| 2018 | 2017 | |||||||
| Current deferred tax asset: | ||||||||
| Net operating loss carryforwards | $ | (13,124 | ) | $ | (18,309 | ) | ||
| Capital loss | (6 | ) | (10 | ) | ||||
| Bargain purchase | 417 | 643 | ||||||
| RSU & stock option expense | (1,835 | ) | (2,349 | ) | ||||
| Fixed Assets and Intangibles | (212 | ) | (327 | ) | ||||
| Charitable Contributions | (3 | ) | (5 | ) | ||||
| Bad Debt | - | - | ||||||
| Total cumulative deferred tax assets | (14,763 | ) | (18,339 | ) | ||||
| Valuation allowance | 14,763 | 18,339 | ||||||
| Effective income tax asset | $ | - | $ | - | ||||
Income tax provision is summarized below (in thousands):
| 2018 | 2017 | |||||||
| Current expense (benefit) | ||||||||
| Federal | $ | - | $ | - | ||||
| State | - | - | ||||||
| Total current | - | - | ||||||
| Deferred expense (benefit) | ||||||||
| Federal | (3,992 | ) | (4,600 | ) | ||||
| State | (570 | ) | (414 | ) | ||||
| Total deferred | (4,562 | ) | (5,014 | ) | ||||
| Less: Valuation allowance | 4,562 | 5,014 | ||||||
| Total | $ | - | $ | - | ||||
For the years ended December 31, 2018 and December 31, 2017, the deferred tax asset of $14,763,000 and $18,384,000, respectively, has a valuation allowance of $14,763,000 and $18,384,000, respectively, since management has determined the tax benefit cannot be reasonably assured of being used in the near future. The net operating loss carryforward, if not used, will begin to expire in 2029, and is severely restricted as per the Internal Revenue Code if there is a change in ownership.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-27 |
The following is a summary of the combined net operating loss carryforward (in thousands):
| Federal | Colorado | |||||||
| December 31, 2017 | $ | 48,460 | $ | 49,460 | ||||
| December 31, 2018 | 5,280 | 5,280 | ||||||
| Balance | $ | 53,740 | $ | 54,740 | ||||
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2018, and 2017, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are strongly influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2018 and 2017.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2018, and 2017, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards from those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
NOTE 9 – GOING CONCERN
The consolidated financial statements have been prepared assuming the Company will continue as a going oncern. The Company has not generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $12,924,000 during the years ended December 31, 2017. The Company also consumed $1,140,000 in operating activities for its year ended December 31, 2018. At December 31, 2018, the Company has a working capital deficit and an accumulated deficit of approximately $20,228,000 and $94,454,000, respectively. The HCIC seller carry back debt and the GrowCo notes are in technical default.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management’s plans to mitigate.
Since December 31, 2018 to March 31, 2019 the Company has collected the following amounts:
| ● | $60,000 from Investors Fiduciary; | |
| ● | $2,500 from Wayne Harding, and | |
| ● | $47,000 from a closing of two lots of our El Paso land properties. |
We are in the process of securing additional debt financing on the land and water assets that we own that are unencumbered and from our potential strategic partners.
Additionally, we continue to reduced our general and administrative expenses and cash required for our operations.
Management Plans
The Company has open discussions with a group of potential strategic investors that include Vaxa, Ekstrak Labs, and Gramz to provide additional working capital.
We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results. We believe the actions will satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
GrowCo $4M Notes Guaranty
During the period ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse and associated warehouse. The notes pay 22.5% in annual interest, with interest paid monthly, and are due April 1, 2020. GrowCo cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes are in technical default.
On January 19, 2018, Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint requested immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-28 |
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Operating Leases
In January 2016, the Company entered into a new lease with the Colorado Center in Denver Colorado for the corporate headquarters. The space is 1,775 square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The lease terminates on June 30, 2018. On March 1, 2017 the Company entered into a sub-lease agreement with our related party McGrow for these office facilities. McGrow did not fulfill its sub-lease agreement. In 2018, Two Rivers paid Colorado Center $24,000 as a penalty for early lease termination.
In February 2017 we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This space is 1,554 square feet and monthly payments of $2,201 which began on April 1, 2017. The lease terminates on March 31, 2020. The amounts due at the base rate are as follows:
| Period | Amount Due | |||
| 2019 | $ | 28,000 | ||
| 2020 | $ | 7,000 | ||
| 2021 | - | |||
Defined Contribution Plan
Two Rivers does not have a defined contribution plan.
Employment Agreements
Effective January 1, 2011, the Company entered into an employment agreement with Wayne Harding, as Chief Executive Officer and Chairman. The initial term of the contract was one year, which renews automatically for successive one-year terms unless and until either party delivers notice of termination within 30 days of the expiration of the then current term. The original employment agreement was modified in 2017.
The Board determines annual incentive compensation at the Board’s sole discretion. If there is a change of control, Mr. Harding is entitled to an accelerated option vesting.
Prior Board of Directors Litigation
On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer Rockey Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite (“RCA”) for services rendered to the former board members at their behest while members of the board. The Company has agreed to pay $139,000 to RCA on behalf of Channer, Wells and Stroh. The $139,000 is included in our accounts payable on the balance sheet.
DFP Litigation
On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims.
| Two Rivers Water & Farming Company | 2018 Financials | Page F-29 |
State of Colorado Litigation
Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.
The State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two Rivers to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November 2018. The case against Two Rivers and all the individuals is currently scheduled for trial starting October 28, 2019. The Company has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines.
NOTE 11 – RELATED PARTY TRANSACTIONS
Pursuant to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2018, management has evaluated related parties and all transactions associated with those and determined that no transactions exist which would require disclosure, except as disclosed below:
| ● | In August 2017, Mr. Harding loaned the Company $50,000 in the El Paso Land Notes. | |
| ● | On December 1, 2018, the prior board of directors, Messrs. Harding, Morris, Wiggins, Bragg, Harnish and Cochran, paid, on behalf of Two Rivers, $44,800 ($6,400 per director) to purchase a tail policy on the prior directors and officers insurance. On December 10, 2018, these amounts were repaid in full including a total of $600 in interest. | |
| ● | On December 10, 2018 Wayne Harding, Company Chief Executive Officer provided a short-term loan to Two Rivers of $2,500. The loan is secured by the El Paso county land assets of Two Rivers and carried an interest rate of 12%. The note remains outstanding. | |
| ● | On December 17, 2018, Wayne Harding provided a short-term loan to Two Rivers of $15,000. It has the same terms and security as the December 10, 2018 note. The note remains outstanding. | |
| ● | Mr. Harding loaned the Company $2,500 in January 2018. |
NOTE 12 – SUBSEQUENT EVENTS
Pursuant to FASB ASC 855, management has evaluated all events and transactions that occurred from December 31, 2018 through the date of issuance of these financial statements. During this period, the Company did had the following significant subsequent events, except as disclosed below.
| ● | On January 30, 2019 the three independent board members were each granted 250,000 options, with a strike price of $0.13/share, vesting immediately, with a 10-year term. | |
| ● | During the three months ended March 31, 2019, Mr. Wayne Harding was paid $2,500 toward a note payable. Subsequently Mr. Harding loan an additional $2,500 to the Company. | |
| ● | On March 6, 2019, Vaxa provided $60,000 to the Company as an increase to the note payable to Investors Fiduciary note. | |
| ● | The Company issued the following common shares: |
| ○ | 3,040,350 common shares to fully pay the Powderhorn/Silverback note; | |
| ○ | 1,179,817 common shares to fully pay the Morningview Financial note | |
| ○ | 555,555 to an investor relations firm. |
| ● | On April 10, 2019, the Company received $100,000 in the form of a note from Investors Fiduciary. |
| Two Rivers Water & Farming Company | 2018 Financials | Page F-30 |
EXHIBIT 21.1
List of Subsidiaries of Two Rivers Water & Farming
| Company | State of Organ-ization | Ultimate Parent | Immediate Parent | Ownership % | ||||
| TR Capital Partners, LLC | CO | Two Rivers Water & Farming Company | Two Rivers Water & Farming Company | 100 | ||||
| TRWC, Inc. | CO | Two Rivers Water & Farming Company | Two Rivers Water & Farming | 100 | ||||
| HCIC Holdings, LLC | CO | Two Rivers Water & Farming Company | TRWC, Inc. | 100 | ||||
| Huerfano-Cucharas Irrigation Company | CO | Two Rivers Water & Farming Company | HCIC Holdings, LLC | 95 | ||||
| Two Rivers Water LLC | CO | Two Rivers Water & Farming Company | TR Capital Partners, LLC | 100 | ||||
| Orlando Reservoir No. 2 Company, LLC | CO | Two Rivers Water LLC | TR Capital Partners, LLC | 100 | ||||
| Two Rivers Farms LLC | CO | Two Rivers Water & Farming Company | TR Capital Partners, LLC | 100 | ||||
| Two Rivers Farms F-1, Inc. | CO | Two Rivers Water & Farming Company | Two Rivers Farms LLC | 100 | ||||
| Two Rivers Farms F-2, Inc. | CO | Two Rivers Water & Farming | Two Rivers Farms LLC | 100 | ||||
| Dionisio Farms & Produce, Inc. (Inactive) | CO | Two Rivers Water & Farming Company | Two Rivers Farms LLC | 100 | ||||
| Water Redevelopment Company | CO | Two Rivers Water & Farming Company | Two Rivers Water & Farming Company | 95 |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference of our report dated April 12, 2019 relating to our audit of the consolidated financial statements of Two Rivers Water & Farming Company that appear in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
April 15, 2019
Exhibit 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wayne Harding, certify that:
1. I have reviewed this annual report on Form 10-K of Two Rivers Water & Farming Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
(e) Based upon our evaluation of internal controls, the Company’s management determined that the Company’s controls over financial reporting were not adequate to ensure these calculations were performed correctly. As such, the Company’s Chief Executive Officer/Chief Financial Officer and Vice President of Finance and Accounting have concluded that the Company’s disclosure controls and procedures contain a material weakness as of the end of the period covered by this Report. Because of the material weakness’ identified, a reasonable possibility exists that a material misstatement in our consolidated financial statements will not be prevented or detected on a timely basis. While our internal controls are established and followed, it is clear by the identified weaknesses that they were not operating as they should be. Management believes that this was the case due to our limited staff along with time constraints and staff turnover. However, our Chief Executive Officer, who is also our Principal Accounting Officer, believes that the financial statements included in this annual report on Form 10-K present, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.
5. I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.
| Dated: April 15, 2019 | By: | /s/ Wayne Harding |
| Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Chairman of the Board |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), Wayne Harding, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Two Rivers Water & Farming Company (the “Company”) each hereby certifies that, to the best of their knowledge:
| 1. | The Company’s Annual Report on Form 10-K for the period ended December 31, 2018, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and | |
| 2. | The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
In Witness Whereof, the undersigned have set their hands hereto as of the 15th day of April 2019.
| By: | /s/ Wayne Harding | |
Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Chairman of the Board |
“This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Two Rivers Water & Farming Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.”
Document and Entity Information - USD ($) |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Apr. 05, 2019 |
Jun. 30, 2018 |
|
| Document And Entity Information | |||
| Entity Registrant Name | TWO RIVERS WATER & FARMING Co | ||
| Entity Central Index Key | 0001302946 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2018 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | No | ||
| Entity Voluntary Filer | No | ||
| Entity Reporting Status Current | Yes | ||
| Entity Filer Category | Non-accelerated Filer | ||
| Entity Small Business Flag | true | ||
| Entity Emerging Growth Company | false | ||
| Entity Ex Transition Period | false | ||
| Entity Shell Company | false | ||
| Entity Public Float | $ 4,449,000 | ||
| Entity Common Stock, Shares Outstanding | 50,350,180 | ||
| Trading Symbol | TURV | ||
| Document Fiscal Period Focus | FY | ||
| Document Fiscal Year Focus | 2018 |
Consolidated Balance Sheets (Parenthetical) - $ / shares |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, shares issued | 45,574,458 | 32,749,920 |
| Common stock, shares outstanding | 45,574,458 | 32,749,920 |
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 5,000,000 | 5,000,000 |
| Preferred stock, shares issued | 64,935 | 64,935 |
| Preferred stock, shares outstanding | 64,935 | 64,935 |
Consolidated Statements of Cash Flows (Parenthetical) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Statement of Cash Flows [Abstract] | ||
| Interest capitazlied into CIP | $ 0 | $ 122 |
Organization and Business |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Accounting Policies [Abstract] | |
| Organization and Business |
NOTE 1 – ORGANIZATION AND BUSINESS
The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to “Two Rivers,” or the “Company” is to Two Rivers Water & Farming Company and its subsidiaries.
Corporate Evolution
Prior to 2009, the Company was named Navidec Financial Services, Inc. (“Navidec”) and had been engaged in mortgage lending and other enterprises unrelated to its current lines of business. Navidec was incorporated in the state of Colorado on December 20, 2002. On July 28, 2009, Navidec formed a wholly-owned Colorado corporation for the purpose of acquiring farm and water assets in the Colorado Huerfano/Cucharas watershed. On November 19, 2009, with shareholder approval, Navidec changed its name to Two Rivers Water Company. On December 11, 2012, with shareholder approval, the Company changed its name to Two Rivers Water & Farming Company.
On January 29, 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations. We formed a new company, TR Capital Partners, LLC or TR Capital, which issued all of its common units to Two Rivers Water & Farming Capital. TR Capital then initiated the transactions described below under “Placement of Preferred Units”. Following the completion of those transactions in September 2014, TR Capital and our other direct and indirect subsidiaries (excluding HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company) entered into a series of related transactions as the result of which assets and operations of such other subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates all of the operations formerly conducted by those subsidiaries.
Overview
In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of September 30, 2018, we own 6,430 gross acres. Gross acres owned decreased from 6,538 gross acres at December 31, 2017 due to the sale of 108 acres.
We are focused on water assets we have acquired and will potentially acquire in the future. Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus our name Two Rivers Water Farming & Water Company. Our water assets are located in a basin that spans over 1,500 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors.
Since October 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest. We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest strategically in the assets that will. We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’ common shareholders. As of March 31, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000, or 29.12%. The reported outstanding shares were provided to the Company by GrowCo’s management.
The Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July 17, 2018 the Company was notified by GrowCo’s management that GrowCo will not provide the requested financial information. This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities is no longer required under US GAAP.
Water Redevelopment Company
We formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets from the rest of our business and to enable additional raising of capital for the purpose of investing in our water assets. Water Redevelopment Company is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management and delivery. Water is one of the most basic, core assets. Water Redevelopment’s first area of focus is in the Huerfano-Cucharas river basin in southeastern Colorado. |
Summary of Significant Accounting Policies |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company, TR Capital and its subsidaries: Two Rivers Farms, and Two Rivers Water. All significant inter-company balances and transactions have been eliminated in consolidation.
Under guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended June 30, 2018, GrowCo and its related entities were consolidated. Once it was determined to no longer consolidate GrowCo and its related entities, deconsolidation accounting was performed.
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States.
Deconsolidation of GrowCo, Inc.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally, US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a. The aggregate of all of the following:
1. The fair value of any consideration received. In Two Rivers case, no consideration was received.
2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were no retained noncontrolling investments in GrowCo or its related entities.
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s assets.
Investment in GrowCo Partners 1, LLC (GCP1)
Due to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted for under the equity method. As of December 31, 2018, Two Rivers owns 34.56% of GCP1. For the year ended December 31, 2018, the Company recognized a $115,000 loss which also reduced the Company’s carrying value in its GCP1 investment.
Non-controlling Interest
Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
During the year ended December 31, 2014, investors in Two Rivers Farms F-1 (convertible notes and preferred shares), Two Rivers Farms F-2 (convertible notes and preferred shares), the Company’s preferred shares, ASF convertible notes, DFP preferred shares, Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners, LLC and were issued 30,159,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.
The 30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20, Debt (and other convertible instruments with beneficial convertible features (“BCF”), the Company determined that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000 were recorded for the year ended December 31, 2014.
Two Rivers also formed three LLC special entities (TR Cap 20150630, Distribution, TR Cap 20150930 Distribution and TR Cap 20151231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership units.
Below is the breakdown of the non-controlling interest share of gains (losses):
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:
The fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
Recurring Fair Value Measurements
The carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value. The carrying value of cash held as demand deposits, money market and certificates of deposit, marketable investments, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. Marketable investments are valued at Level 1 due to readily available market quotes. The fair value of the Company’s long-term debt, including the current portion approximated its carrying value. Fair value for long-term debt was estimated based on quoted market prices of the identical debt instruments or values of comparable borrowings.
Accounts Receivable, Related Party
The Company carries its accounts receivable, net at management’s expectation of collection and past experience. As of December 31, 2018, and 2017, the Company did not have an allowance for doubtful accounts receivable based on past payment performance. The Accounts Receivable, Related Party for December 31, 2017, reflects amounts owed from an entity controlled by our prior CEO.
Capitalization of Interest
As of December 31, 2017, $897,000 in notes payable interest has been capitalized in the construction of greenhouse 1 and 2. There was no capitalization of interest during the year ended December 31, 2018.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to twenty-seven and a half years. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Below is a summary of property and equipment:
Land
Land acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore, additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land (Property and Equipment above). Land is not depreciated. However, once per year, management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.
The Company’s land located in El Paso County, Colorado is being partially developed into 35 to 40 acre lots to be sold. For the year ended December 31, 2018 the Company recognized a gain of $238,000 from approximately $360,000 in land sales.
Water rights and infrastructure
Subsequent to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. No amortization or depreciation is taken on the water rights. See the discussion below concerning Impairments – Water rights and infrastructure.
Intangibles
Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in HCIC and Orlando. These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado.
Impairments
Property and Equipment
Once per year we review all property, equipment and software owned by the Company and compared the net book value of such assets with the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value of the affected asset will be recorded, and the impairment will not be reversed in future periods.
Land
Once per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.
Water rights and infrastructure
Once per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not be reversed in future periods.
Prior to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis caused the recognition of $6,900,000 impairment to the water infrastructure.
In 2018 the Company obtained two independent appraisals covering its water assets. The appraisals were in excess of the Company’s carrying value of it water rights and infrastructure.
Impairment of DFP Intangibles
In 2016, due to the discontinuance of DFP operations, we wrote off the full value of DFP intangibles (see Note 4).
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the twelve months ended December 31, 2018 and 2017.
Leasing Greenhouse
The lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainty of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
Farming
The Company had no revenues from farming for the year ended December 31, 2017. For the year ended December 31, 2018, the Company recognized approximately $18,000 in net crop share revenues. During 2018, the Company entered into a crop share arrangement for a percentage of a hemp crop produced on 4 acres of farm land at Butte Valley in Huerfano County, Colorado. A net payment of $18,000 for the Company’s share was received in the three months ended December 31, 2018.
Other
For the year ending December 31, 2018, the Company had approximately $48,000 in other revenues from grazing leases and member assessments. For the year ending December 31, 2017, the Company had approximately $72,000 in other revenues from grazing leases and member assessments.
Member Assessments
Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to HCIC are eliminated in consolidation of the financial statements.
HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments.
Stock Based Compensation
Beginning January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
All options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of adoption.
Debt and Equity
The Company accounts for warrants issued with debt in accordance with Accounting Standards Codification (“ASC”) 470, Debt, and allocates proceeds received to the warrants based on relative fair values.
The Company also evaluates whether the issuance of the convertible instruments generates a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company would recognize the BCF by allocating the intrinsic value of the conversion option, which is the number of ordinary shares available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of each ordinary share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible preferred shares or debt instruments. No BCF has been recognized in the periods presented.
Preferred Dividend payable
Preferred dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of December 31, 2018 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $33,000.
Beginning on July 1, 2018, the Company terminated the accrual of the preferred dividends payable to TR Capital preferred members due to a binding letter of intent executed with an outside strategic partner.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2018, no accrued interest or penalties are included on the related tax liability line in the balance sheet.
Net Income (Loss) per Share
Basic net (loss) per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period.
The dilutive effect of the outstanding 3,058,500 options, and 17,537,896 warrants at December 31, 2018 and December 31, 2017, have an exercise price in excess of the Company’s closing price of $0.17/share as of December 28, 2018; therefore these shares have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive. However, during the quarter ending March 31, 2019, existing convertible debt was converted into 2,269,198 of the Company’s common shares. Therefore, these additional shares are added to the basic shares for the nine months ended December 31, 2018.
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In July 2017, the FASB issued Accounting Standards Update (“ASU”) “Income Statement – Reporting Comprehensive Income (Topic 220)”. This ASU deals with the reclassification of certain tax effects from Accumulated Other Comprehensive Income. The Company does not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in the future it may have an impact on its financial statements with the adoption of this new accounting pronouncement.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. |
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| Discontinued Operations and Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discontinued Operations (DFP) and Deconsolidation (GrowCO) |
NOTE 3 – DISCONTINUED OPERATIONS (DFP) AND DECONSOLIDATION (GROWCO)
DFP
During the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided to sell all assets associated with this business due to the sustained losses incurred.
The loss from DFP discontinued operations presented in the statements of operations consist of the following for the year ended December 31, 2018 and December 31, 2017:
On March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds from the auction were $1,740,000 with net proceeds estimated to be $1,583,000. Proceeds were used to pay off secured debt first with any residual proceeds used to pay unsecured debt.
GrowCo and related entities
According to ASC 810-10-40-4 Two Rivers shall deconsolidate a subsidiary or derecognize a group of assets as of the date the parent ceases to have a controlling financial interest in that subsidiary or group of assets. Management determined this date was April 1, 2018 to deconsolidate GrowCo and GrowCo’s related entities.
Further, a primary beneficiary’s financial statements (i.e., Two Rivers) should reflect the consolidation of a Variable Interest Entity (“VIE”) for each reporting period until it is not required to consolidate the VIE. That is, upon the occurrence of a deconsolidation event, it is appropriate for the primary beneficiary to assume the event had occurred in a prior reporting period to enhance the comparability of financial statements. However, the primary beneficiary should evaluate whether the deconsolidated entity qualifies for discontinued operations treatment pursuant to ASC 205-20.
Accoring to ASC 205-20 for disposals other than by sale (e.g., abandonment, distribution or exchange for similar productive assets), the results of operations of a component of an entity would not be recorded as a discontinued operation until the period in which the long-lived asset or disposal group is either abandoned, distributed or exchanged, depending on the manner of disposal.
Effective April 1, 2018, the Company is no longer consolidating the financials of GrowCo and its related entities. The effect of deconsolidation created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo deconsolidated operations of $810,000; broken down as follows:
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Investments and Long-Lived Assets |
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Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments, All Other Investments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments and Long-Lived Assets |
NOTE 4 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon purchasing land, the value is recorded at the purchase price or fair value, whichever is more accurate. Costs incurred to prepare the land for the intended purpose, which is efficient irrigated farming, is also capitalized in the recorded cost of the land. No amortization or depreciation is taken on Land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for any potential impairments.
Water rights and infrastructure
The Company has acquired both direct flow water rights and water storage rights. We have obtained water rights through the purchase of shares in a mutual ditch company, which we did with our purchase of shares in HCIC, or through the purchase of an entity holding water rights, which we did with our purchase of the Orlando. The Company may also acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court and administered under the jurisdiction of the Office of the State Engineer.
Upon purchasing water rights, the value is recorded at our purchase price. If a majority interest is acquired in a company holding water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines the fair value of the assets. To assist with the valuation, the Company may consider reports from a third-party valuation firm. If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized. If the value of the water assets are less than what the Company paid then goodwill is recognized.
Subsequent to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there $6,930,000 in impairments on the Company’s land and water rights. No amortization or depreciation is taken on the water rights.
Construction in progress – GrowCo
Due to the deconsolidation of GrowCo in 2018, the balance in GrowCo’s work in progress was eliminated.
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Notes Payable |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable |
NOTE 5 – NOTES PAYABLE
The Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method which, in this situation, equals a straight-line method. For the years ended December 31, 2018 and 2017, the Company recognized an accretion of debt discount of $250,000 and $469,000, respectively.
For the year ended December 31, 2018 to Company recognized a loss of approximately $248,000 related to debt modification and extinguishment.
HCIC Seller Carry Back Notes
Beginning on September 17, 2009, Two Rivers began acquiring shares in HCIC and related land from a HCIC shareholder. As part of these acquisitions, many of the sellers financed notes payable with Two Rivers and HCIC. As of December 31, 2012, these loans totaled $7,364,000. The notes carry interest at 6% per annum, interest payable monthly, the principal amounts were due at various dates from March 31, 2013 through September 30, 2016 and are collateralized by HCIC share.
In June 2013, the Company negotiated an extension on holders representing $6,164,000 of the seller carry back notes. Previously these amounts were due either August or September 2013. The holders of the notes agreed to extend the due date to June 30, 2016. In exchange for this extension, the Company increased the principal balance by 20% from $6,164,000 to $7,397,000, paid 5.43% against the principal and agreed to begin paying monthly interest and principal at a 20-year amortization rate.
In May 2016, the Company negotiated another extension on holders representing $5,214,000 to extend the due date from June 30, 2016 to June 30, 2019. The extension reset the amortization period to 12 years, kept interest at 6% per year, and called for a 5% principal reduction in February 2017. Payments to all of the HCIC note holders are behind. The Company is in technical default on $6,323,000 of the HCIC carry back notes due to non-payment of interest and principle. Consequently, the entire amount of the notes has been classified as current.
For the year ended December 31, 2017, holders representing $3,181,000 of the notes held conversion rights into the Company’s common shares at $1.00 to $1.25. These conversions were cancelled and replaced by 5-year warrants at $3.00 per share. A total of 1,367,000 warrants were issued. The warrants issued had a fair value of $277,000 using the Black Scholes method of fair value determination.
Beginning in the fourth quarter of 2018, and still continuing, the Company is working with a third party interested in assuming the entire HCIC Seller Carry Back Notes along with all accrued interest. This third party has obtained non-binding letters of interest from the majority of the current HCIC Seller Carry Back Notes.
Colorado Water Conservation Loan (“CWCB”)
On March 5, 2012, the Company closed long-term financing with the Colorado Department of Natural Resources, Colorado Water Conservation Board in the amount of $1,185,000 (the “CWCB Loan”). This loan partially financed the rehabilitation of the Cucharas Reservoir to temporarily bring it into safety compliance with the Colorado State Engineers office. Further, the CWCB Loan assisted with the rehabilitation of the Orlando facilities through the installation of a new outlet gate/pipe. There was a $12,000 service fee due upon closing. This amount is being amortized over the expected life of the CWCB Loan, which is 20 years with interest fixed at 2.5% per annum. During the year ended December 31, 2016, the Company paid an additional $210,000 toward the CWCB Loan principal in order to release CWCB’s lien on 157 acres being used to build GrowCo greenhouses. As of December 31, 2018, and 2017, the amounts outstanding under the CWCB Loan totaled $690,000 and $748,000, respectively.
McFinney Agri-Finance LLC (McFinney) and Ellicot Second Mortgage (Ellicot)
On March 15, 2013, the Company purchased unimproved land in El Paso county, Colorado for a purchase price of $1,250,000. The company paid $620,000 (including closing costs and allocations) and financed $650,000 McFinney and $400,000 Ellicot, through private investors.
The terms of the McFinney financing is for monthly payments of principal and interest of $4,238 per month, a fixed interest rate of 6.8% per annum, with the remaining principal due on April 1, 2018, which was subsequently extended to April 1, 2019. The note is secured by a deed of trust on the 2,579 acres of land purchased and a guaranty of payment by the Company. As of December 31, 2018 the amount owed was $60,000. This note was paid in full on April 4, 2019.
On April 4, 2019, the principal and interest was paid in full.
GrowCo Note
On September 16, 2016, the Company entered into a note with GrowCo, Inc. based on calculations of amounts due to GrowCo based on GrowCo overpaying overhead of Two Rivers for GrowCo funds. It was due December 31, 2018. The amount is being disputed by GrowCo along with the requested interest. The Company has recognized a balance due of $390,000. The note states interest at 6%, but GrowCo is requesting interest at 22.5%. As of December 31, 2018, the Company has recognize a balance due of $390,000. Management of Two Rivers and GrowCo are in ongoing discussions to determine the amount owed and the interest rate charged.
Powderhorn/Silverback Note
During the three months ended December 31, 2018, the Powderhorn Note was sold to Silverback Securities, by Powderhorn, with no financial impact on the Company nor changes to the note. The remaining payments on this note was paid through the issuance of 2,196,154 of the Company’s common shares and recognized a beneficial conversion expense of approximately $12,000. As of December 31, 2018, the balance is approximately $203,000 and recognized an approximate $248,000 loss due a modification to the Powderhorn Note. As of March 31, 2019 this note was paid in full.
Morningview Financial Convertible Note
On May 4, 2018 the Company entered into a convertible promissory note with Morningview Financial, LLC (“Morningview”) for $105,000. After November 4, 2018, if the note remains outstanding, Morningview has the right to convert its note at a variable conversion price which is 60% of the Company’s common shares lowest market price during a prior 15-day trading period. Company issued 475,452 shares to pay this note and recognized a beneficial conversion expense of approximately $70,000. As of March 31, 2019, this note was paid in full.
El Paso Land Notes
In August 2017, the Company borrowed $275,000 pledging a second lien on property the Company owns in El Paso County Colorado. This loan pays 18%/annum interest and is to be repaid through the sale of 35 to 40 acre lots. The repayment is based on 25% of the net proceeds from sales. For the year ended December 31, 2018, approximately $6,000 was paid on these notes. As of December 31, 2018, the balance is approximately $269,000. The stated maturity date is August 1, 2019. Mr. Wayne Harding, the Company’s CEO, invested $50,000 in these notes.
WRC Convertible Note
For the year ended December 31, 2017, Water Redevelopment Company (WRC) issued convertible notes which are due note April 1, 2020. It carries interest at 12% per annum and is secured by a security interest in the water supply agreement between the Company and a real estate developer in the area of the Orlando/Butte Valley facilities. This note, at the option of the holder, can be converted into one share of WRC preferred shares for each $4.23 of principal balance and accrued interest. There was no beneficial conversion expense recognmized. At December 31, 2018, the principle balance was $500,000.
Butte Valley Land Notes
In May 2018 the Company enter into a $200,000 note with an existing investor to provide working capital funds. This note is secured by certain land owned by the Company referred to Butte Valley (located in Huerfano County, Colorado). Under the terms of this note, 50% of the crop share income payable to the Company from crop share arrangements would be paid to the investor as a payment toward interest and principle due. The Company received permission from the note holder to not make the crop share payment in 2018. This note was due on November 11, 2018. The Company is in the process of obtaining an extension to the due date. As of December 31, 2019, the principla balance was $200,000.
Black Mountain Note
This note was entered into on April 26, 2017. It is an original issuance discount note with the face principal amount of $330,000 and gross cash paid at closing of $300,000. In the three months ended December 31, 2018 this note was paid in full. During the year ended December 31, 2018, the Company issued 900,000 of its common shares and recorded a loss of approximately $89,000 on the debt extinguishment.
Investors Fiduciary LLC
On July 23, 2018, the Company entered into a convertible promissory note with Investors Fiduciary LLC (and related parties) for a bridge loan up to $2,000,000. As of December 31, 2018, $551,000 has been drawn on this note. The note carries interest at 20% per annum and is secured by the Company’s unencumbered 2,456.5 shares in the Huerfano Cucharas Irrigation Company. The holder has a right to convert principal and any accrued interest into the Company’s common shares at a rate of $0.14/share. On July 23, 2018, the Company’s common stock closed at $0.117/share. Therefore, the Company did not record a beneficial conversion feature.
Below is a summary of the Company’s long-term debt:
Schedule of principal payment due by year:
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Information on Business Segments |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Information on Business Segments |
NOTE 6 – INFORMATION ON BUSINESS SEGMENTS
We organize our business segments based on the nature of the products and services offered. Currently, we focus on the Farms and Water business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of businesses: Farms and Water. Water contains our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations may differ from those on the face of the income statement. In 2017, the pior farming operations were discontinued; however, we we continue to report with a Farming Business since we are expanding our farming business in 2019.
In the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate, to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments, and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating results for each of the segments of the Company are as follows (in thousands):
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Equity Transactions |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Transactions |
NOTE 7 - EQUITY TRANSACTIONS
Common Stock
The Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of December 31, 2018, was 45,574,458 common shares.
During the year ended December 31, 2018, Two Rivers had the following common stock transactions:
During the year ended December 31, 2017, Two Rivers had the following common stock transactions:
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:
There were no options issued under the 2005 Plan for the years ending December 31, 2018 and 2017.
A summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
Note (1): 600,000 options were extended and repriced from $1.25/share to $0.70/share
For the year ended December 31, 2017, the Company extended 600,000 options that were due to expire in 2016 and 2017 to expiration dates in 2018 and 2019. This extension resulted in $52,000 of expense being recorded in 2017.
For the year ended December 31, 2017, the Company extended the same 600,000 options and reset the strike price from $1.25/share to $0.70/share and extended the expiration to occur in 2021 and 2022. This extension resulted in $85,000 of expense being recorded in 2017.
Under the 2011 Plan, we have the following stock options issued and outstanding:
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:
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:
The option expense from both the 2011 and 2005 Plans were $888,000 and $467,000 for the years ended December 31, 2018 and 2017, respectively.
The Company can issue stock awards and options for nonemployee services. If stock is granted, the Company values the stock using an average of the closing price of the Company’s stock over the period that the service was rendered. If options are granted, the Company uses the Black-Scholes model for determining fair value (see above).
Warrants
As of December 31, 2018, the Company has outstanding the following warrants to purchase common stock:
For the years ended December 31, 2018 and 2017, warrant expense totaled $50,000 and $331,000, respectively. |
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Income Taxes |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes |
NOTE 8 – INCOME TAXES
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. The Act also created a new minimum tax on certain future foreign earnings. The impact of the Act decreased the Company’s deferred tax asset related to the Company’s net operating loss by approximately $6,500,000 and decreased the Company’s valuation allowance by approximately $6,500,000 resulting in no impact to the Company’s financials.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.
Book loss reconciliation to estimated taxable income is as follows (in thousands):
We will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. At December 31, 2018 and December 31, 2017, we had no unrecognized tax benefits in income tax expense.
Our income tax returns are no longer subject to Federal tax examinations by tax authorities for years before 2014 and state examinations for years before 2014.
The components of the deferred tax asset are as follows (in thousands):
Income tax provision is summarized below (in thousands):
For the years ended December 31, 2018 and December 31, 2017, the deferred tax asset of $14,763,000 and $18,384,000, respectively, has a valuation allowance of $14,763,000 and $18,384,000, respectively, since management has determined the tax benefit cannot be reasonably assured of being used in the near future. The net operating loss carryforward, if not used, will begin to expire in 2029, and is severely restricted as per the Internal Revenue Code if there is a change in ownership.
The following is a summary of the combined net operating loss carryforward (in thousands):
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of December 31, 2018, and 2017, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are strongly influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the deferred tax assets will not be realized. Accordingly, the Company maintained a full valuation allowance as of December 31, 2018 and 2017.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2018, and 2017, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards from those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements. |
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Going Concern |
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| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||||||||
| Going Concern |
NOTE 9 – GOING CONCERN
The consolidated financial statements have been prepared assuming the Company will continue as a going oncern. The Company has not generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $12,924,000 during the years ended December 31, 2017. The Company also consumed $1,140,000 in operating activities for its year ended December 31, 2018. At December 31, 2018, the Company has a working capital deficit and an accumulated deficit of approximately $20,228,000 and $94,454,000, respectively. The HCIC seller carry back debt and the GrowCo notes are in technical default.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management’s plans to mitigate.
Since December 31, 2018 to March 31, 2019 the Company has collected the following amounts:
We are in the process of securing additional debt financing on the land and water assets that we own that are unencumbered and from our potential strategic partners.
Additionally, we continue to reduced our general and administrative expenses and cash required for our operations.
Management Plans
The Company has open discussions with a group of potential strategic investors that include Vaxa, Ekstrak Labs, and Gramz to provide additional working capital.
We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results. We believe the actions will satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months. |
Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||
| Commitments and Contingencies |
NOTE 10 - COMMITMENTS AND CONTINGENCIES
GrowCo $4M Notes Guaranty
During the period ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse and associated warehouse. The notes pay 22.5% in annual interest, with interest paid monthly, and are due April 1, 2020. GrowCo cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes are in technical default.
On January 19, 2018, Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint requested immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Operating Leases
In January 2016, the Company entered into a new lease with the Colorado Center in Denver Colorado for the corporate headquarters. The space is 1,775 square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The lease terminates on June 30, 2018. On March 1, 2017 the Company entered into a sub-lease agreement with our related party McGrow for these office facilities. McGrow did not fulfill its sub-lease agreement. In 2018, Two Rivers paid Colorado Center $24,000 as a penalty for early lease termination.
In February 2017 we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This space is 1,554 square feet and monthly payments of $2,201 which began on April 1, 2017. The lease terminates on March 31, 2020. The amounts due at the base rate are as follows:
Defined Contribution Plan
Two Rivers does not have a defined contribution plan.
Employment Agreements
Effective January 1, 2011, the Company entered into an employment agreement with Wayne Harding, as Chief Executive Officer and Chairman. The initial term of the contract was one year, which renews automatically for successive one-year terms unless and until either party delivers notice of termination within 30 days of the expiration of the then current term. The original employment agreement was modified in 2017.
The Board determines annual incentive compensation at the Board’s sole discretion. If there is a change of control, Mr. Harding is entitled to an accelerated option vesting.
Prior Board of Directors Litigation
On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer Rockey Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite (“RCA”) for services rendered to the former board members at their behest while members of the board. The Company has agreed to pay $139,000 to RCA on behalf of Channer, Wells and Stroh. The $139,000 is included in our accounts payable on the balance sheet.
DFP Litigation
On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims.
State of Colorado Litigation
Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.
The State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two Rivers to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November 2018. The case against Two Rivers and all the individuals is currently scheduled for trial starting October 28, 2019. The Company has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines. |
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Related Party Transactions |
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| Related Party Transactions [Abstract] | ||||||||||||||||
| Related Party Transactions |
NOTE 11 – RELATED PARTY TRANSACTIONS
Pursuant to ASC 850 “Related Party Disclosure”, during the year ended December 31, 2018, management has evaluated related parties and all transactions associated with those and determined that no transactions exist which would require disclosure, except as disclosed below:
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Subsequent Events |
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| Subsequent Events [Abstract] | |||||||||||||||||||||||||
| Subsequent Events |
NOTE 12 – SUBSEQUENT EVENTS
Pursuant to FASB ASC 855, management has evaluated all events and transactions that occurred from December 31, 2018 through the date of issuance of these financial statements. During this period, the Company did had the following significant subsequent events, except as disclosed below.
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Summary of Significant Accounting Policies (Policies) |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation |
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company, TR Capital and its subsidaries: Two Rivers Farms, and Two Rivers Water. All significant inter-company balances and transactions have been eliminated in consolidation.
Under guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended June 30, 2018, GrowCo and its related entities were consolidated. Once it was determined to no longer consolidate GrowCo and its related entities, deconsolidation accounting was performed. |
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| Basis of Presentation |
Basis of Presentation
The consolidated financial statements and related disclosures have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared using the accrual basis of accounting in accordance with Generally Accepted Accounting Principles (“GAAP”) of the United States. |
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| Deconsolidation of GrowCo, Inc |
Deconsolidation of GrowCo, Inc.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally, US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a. The aggregate of all of the following:
1. The fair value of any consideration received. In Two Rivers case, no consideration was received.
2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were no retained noncontrolling investments in GrowCo or its related entities.
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s assets. |
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| Investment in GrowCo Partners 1, LLC (GCP1) |
Investment in GrowCo Partners 1, LLC (GCP1)
Due to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted for under the equity method. As of December 31, 2018, Two Rivers owns 34.56% of GCP1. For the year ended December 31, 2018, the Company recognized a $115,000 loss which also reduced the Company’s carrying value in its GCP1 investment. |
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| Non-controlling Interest |
Non-controlling Interest
Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
During the year ended December 31, 2014, investors in Two Rivers Farms F-1 (convertible notes and preferred shares), Two Rivers Farms F-2 (convertible notes and preferred shares), the Company’s preferred shares, ASF convertible notes, DFP preferred shares, Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners, LLC and were issued 30,159,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.
The 30,159,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into 1 common stock share of the Company and one-half warrant to purchase a share of stock of the Company. In accordance with ASC Topic 470-20, Debt (and other convertible instruments with beneficial convertible features (“BCF”), the Company determined that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000 were recorded for the year ended December 31, 2014.
Two Rivers also formed three LLC special entities (TR Cap 20150630, Distribution, TR Cap 20150930 Distribution and TR Cap 20151231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership units.
Below is the breakdown of the non-controlling interest share of gains (losses):
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| Reclassification |
Reclassification
Certain amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications have been changed. |
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| Use of Estimates |
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. |
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| Cash and Cash Equivalents |
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. |
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| Concentration of Credit Risk |
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. |
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| Fair Value of Measurements and Disclosures |
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:
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. |
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| Accounts Receivable, Related Party |
Accounts Receivable, Related Party
The Company carries its accounts receivable, net at management’s expectation of collection and past experience. As of December 31, 2018, and 2017, the Company did not have an allowance for doubtful accounts receivable based on past payment performance. The Accounts Receivable, Related Party for December 31, 2017, reflects amounts owed from an entity controlled by our prior CEO. |
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| Capitalization of Interest |
Capitalization of Interest
As of December 31, 2017, $897,000 in notes payable interest has been capitalized in the construction of greenhouse 1 and 2. There was no capitalization of interest during the year ended December 31, 2018. |
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| Property and Equipment |
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to twenty-seven and a half years. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Below is a summary of property and equipment:
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| Land |
Land
Land acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore, additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land (Property and Equipment above). Land is not depreciated. However, once per year, management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.
The Company’s land located in El Paso County, Colorado is being partially developed into 35 to 40 acre lots to be sold. For the year ended December 31, 2018 the Company recognized a gain of $238,000 from approximately $360,000 in land sales. |
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| Water Rights and Infrastructure |
Water rights and infrastructure
Subsequent to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. No amortization or depreciation is taken on the water rights. See the discussion below concerning Impairments – Water rights and infrastructure. |
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| Intangibles |
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. |
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| Impairments |
Impairments
Property and Equipment
Once per year we review all property, equipment and software owned by the Company and compared the net book value of such assets with the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value of the affected asset will be recorded, and the impairment will not be reversed in future periods.
Land
Once per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.
Water rights and infrastructure
Once per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not be reversed in future periods.
Prior to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.
For the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis caused the recognition of $6,900,000 impairment to the water infrastructure.
In 2018 the Company obtained two independent appraisals covering its water assets. The appraisals were in excess of the Company’s carrying value of it water rights and infrastructure.
Impairment of DFP Intangibles
In 2016, due to the discontinuance of DFP operations, we wrote off the full value of DFP intangibles (see Note 4). |
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| Revenue Recognition |
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the twelve months ended December 31, 2018 and 2017.
Leasing Greenhouse
The lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainty of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
Farming
The Company had no revenues from farming for the year ended December 31, 2017. For the year ended December 31, 2018, the Company recognized approximately $18,000 in net crop share revenues. During 2018, the Company entered into a crop share arrangement for a percentage of a hemp crop produced on 4 acres of farm land at Butte Valley in Huerfano County, Colorado. A net payment of $18,000 for the Company’s share was received in the three months ended December 31, 2018.
Other
For the year ending December 31, 2018, the Company had approximately $48,000 in other revenues from grazing leases and member assessments. For the year ending December 31, 2017, the Company had approximately $72,000 in other revenues from grazing leases and member assessments.
Member Assessments
Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to HCIC are eliminated in consolidation of the financial statements.
HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments. |
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| Stock Based Compensation |
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. |
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| Debt and Equity |
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. |
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| Preferred Dividend Payable |
Preferred Dividend payable
Preferred dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of December 31, 2018 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $33,000.
Beginning on July 1, 2018, the Company terminated the accrual of the preferred dividends payable to TR Capital preferred members due to a binding letter of intent executed with an outside strategic partner. |
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| Income Taxes |
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2018, no accrued interest or penalties are included on the related tax liability line in the balance sheet. |
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| Net Income (Loss) Per Share |
Net Income (Loss) per Share
Basic net (loss) per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period.
The dilutive effect of the outstanding 3,058,500 options, and 17,537,896 warrants at December 31, 2018 and December 31, 2017, have an exercise price in excess of the Company’s closing price of $0.17/share as of December 28, 2018; therefore these shares have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive. However, during the quarter ending March 31, 2019, existing convertible debt was converted into 2,269,198 of the Company’s common shares. Therefore, these additional shares are added to the basic shares for the nine months ended December 31, 2018. |
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| Recently Issued Accounting Pronouncements |
Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” . The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
In July 2017, the FASB issued Accounting Standards Update (“ASU”) “Income Statement – Reporting Comprehensive Income (Topic 220)”. This ASU deals with the reclassification of certain tax effects from Accumulated Other Comprehensive Income. The Company does not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in the future it may have an impact on its financial statements with the adoption of this new accounting pronouncement.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements. |
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Summary of Significant Accounting Policies (Tables) |
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Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Noncontrolling Interest to Derecognized |
In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
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| Schedule of Detail of Non-controlling Interest |
Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
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| Schedule of Non-controlling Interest Share of Gains (Losses) |
Below is the breakdown of the non-controlling interest share of gains (losses):
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| Schedule of Property and Equipment |
Below is a summary of property and equipment:
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Discontinued Operations and Deconsolidation (GrowCO) (Tables) |
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| Discontinued Operations and Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Income from Discontinued Operations |
The loss from DFP discontinued operations presented in the statements of operations consist of the following for the year ended December 31, 2018 and December 31, 2017:
The effect of deconsolidation created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo deconsolidated operations of $810,000; broken down as follows:
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Investments and Long-lived Assets (Tables) |
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Dec. 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments, All Other Investments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Construction Costs |
Due to the deconsolidation of GrowCo in 2018, the balance in GrowCo’s work in progress was eliminated.
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Notes Payable (Tables) |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Long Term Debt |
Below is a summary of the Company’s long-term debt:
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| Schedule of Current Portion Long Term Debt |
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| Schedule of Principal Payment |
Schedule of principal payment due by year:
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Information on Business Segments (Tables) |
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| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Operating Results by Segment |
Operating results for each of the segments of the Company are as follows (in thousands):
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Equity Transactions (Tables) |
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Fair Value of Options |
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:
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| Schedule of Warrants Outstanding |
As of December 31, 2018, the Company has outstanding the following warrants to purchase common stock:
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| 2005 Plan [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options Issued and Outstanding |
Under the 2005 Plan, we have the following stock options issued and outstanding:
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| Summary of Stock Option Plan |
A summary of the Two Rivers 2005 Option Plan (“2005 Plan”) is as follows:
Note (1): 600,000 options were extended and repriced from $1.25/share to $0.70/share |
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| 2011 Plan [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options Issued and Outstanding |
Under the 2011 Plan, we have the following stock options issued and outstanding:
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| Summary of Stock Option Plan |
A summary of the Two Rivers 2011 Long-Term Stock Incentive Plan (“2011 Plan”) is as follows:
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Income Taxes (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Taxable Income |
Book loss reconciliation to estimated taxable income is as follows (in thousands):
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| Schedule of Components of Deferred Tax Assets |
The components of the deferred tax asset are as follows (in thousands):
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| Schedule of Income Tax Provision |
Income tax provision is summarized below (in thousands):
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| Summary of Net Operating Loss Carryforward |
The following is a summary of the combined net operating loss carryforward (in thousands):
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Commitments and Contingencies (Tables) |
12 Months Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2018 | |||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||
| Schedule of Lease Amount Due at Base Rate |
The amounts due at the base rate are as follows:
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Organization and Business (Details Narrative) |
1 Months Ended | |||||
|---|---|---|---|---|---|---|
|
May 31, 2014
shares
|
Dec. 31, 2018
a
shares
|
Sep. 30, 2018
a
|
Mar. 31, 2018
shares
|
Dec. 31, 2017
a
shares
|
Aug. 01, 2014
shares
|
|
| Acres owned | 6,430 | 6,538 | ||||
| Sale of acres | 108 | |||||
| Number of shares outstanding | shares | 45,574,458 | 32,749,920 | ||||
| GrowCo [Member] | ||||||
| Shares issued by subsidiary | shares | 20,000,000 | |||||
| Shares reserved for issuance | shares | 10,000,000 | 10,000,000 | ||||
| Number of shares outstanding | shares | 34,343,000 | |||||
| Shares outstanding, percentage | 29.12% | |||||
| Cucharas River [Member] | ||||||
| Water asset area | 1,500 | |||||
| Arkansas River [Member] | ||||||
| Water asset area | 14,000 | |||||
| Colorado [Member] | ||||||
| Water asset area | 4,500 |
Summary of Significant Accounting Policies - Schedule of Non-controlling Interest Share of Gains (Losses) (Details) (Parenthetical) |
12 Months Ended |
|---|---|
Dec. 31, 2018 | |
| Preferred share dividend rate | 25.00% |
| HCIC [Member] | |
| Noncontrolling interest, ownership percentage | 95.00% |
Summary of Significant Accounting Policies - Schedule of Property and Equipment (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Property and Equipment, Subtotal | $ 247 | $ 411 |
| Less: Accumulated Depreciation | (227) | (251) |
| Property and Equipment, Net book value | $ 20 | 160 |
| Minimum [Member] | ||
| Useful life of assets | 3 years | |
| Property and Equipment, Net book value | $ 5 | |
| Maximum [Member] | ||
| Useful life of assets | 27 years 6 months | |
| Office Equipment and Furniture [Member] | ||
| Property and Equipment, Subtotal | $ 12 | 12 |
| Office Equipment and Furniture [Member] | Minimum [Member] | ||
| Useful life of assets | 5 years | |
| Office Equipment and Furniture [Member] | Maximum [Member] | ||
| Useful life of assets | 7 years | |
| Computers [Member] | ||
| Useful life of assets | 3 years | |
| Property and Equipment, Subtotal | $ 46 | 46 |
| Vehicles [Member] | ||
| Useful life of assets | 5 years | |
| Property and Equipment, Subtotal | $ 25 | 92 |
| Farm Equipment [Member] | ||
| Property and Equipment, Subtotal | $ 147 | 244 |
| Farm Equipment [Member] | Minimum [Member] | ||
| Useful life of assets | 7 years | |
| Farm Equipment [Member] | Maximum [Member] | ||
| Useful life of assets | 10 years | |
| Buildings [Member] | ||
| Useful life of assets | 27 years 6 months | |
| Property and Equipment, Subtotal | $ 10 | 10 |
| Website [Member] | ||
| Useful life of assets | 3 years | |
| Property and Equipment, Subtotal | $ 7 | $ 7 |
Discontinued Operations and Deconsolidation (GrowCO) (Details Narrative) - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Mar. 03, 2017 |
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Gross proceeds from sale of land and water assets | $ 127 | $ 1,721 | |
| Gain on deconsolidation | (12,773) | ||
| Deconsolidation Date As of April 1, 2018 [Member] | |||
| Gain on deconsolidation | 12,773 | ||
| Discontinued Operations [Member] | |||
| Gross proceeds from sale of land and water assets | $ 1,740 | ||
| Net proceeds from sale of land and water assets | $ 1,583 | ||
| Discontinued Operations [Member] | GrowCo [Member] | Deconsolidation Date As of April 1, 2018 [Member] | |||
| Net proceeds from sale of land and water assets | |||
| Gain on deconsolidation | 12,773 | ||
| Loss from discontinued operation | $ 810 | ||
Discontinued Operations and Deconsolidation (GrowCO) - Schedule of Income from Discontinued Operations (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Total | $ (810) | $ (1,045) |
| Dionisio Farms and Produce [Member] | ||
| Revenues | ||
| Cost of goods sold | ||
| General and administrative expenses | (993) | |
| Depreciation and amortization | (1) | |
| Interest | (43) | |
| Other (gain (loss) on disposal of assets and intangibles) | (8) | |
| Total | (1,045) | |
| GrowCo and Related Entities [Member] | ||
| Revenues | 52 | |
| Cost of goods sold | ||
| General and administrative expenses | (89) | |
| Depreciation and amortization | (61) | |
| Interest | (1,092) | |
| Non-controlling interest | 380 | |
| Total | $ (810) | |
Investments and Long-Lived Assets (Details Narrative) $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2018
USD ($)
| |
| Land and Water [Member] | |
| Impairment of long lived assets | $ 6,930 |
Investments and Long-lived Assets - Schedule of Construction Costs (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Investments, All Other Investments [Abstract] | ||
| Construction Costs, Beginning balance | $ 3,361 | $ 3,520 |
| Additions | 506 | |
| Finished and Transferred | (665) | |
| Deconsolidation of GrowCo | (3,361) | |
| Construction Costs, Ending balance | $ 3,361 | |
Notes Payable (Details Narrative) |
1 Months Ended | 3 Months Ended | 12 Months Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
May 04, 2018
USD ($)
shares
|
Apr. 26, 2017
USD ($)
|
Sep. 16, 2016 |
Mar. 15, 2013
USD ($)
a
|
Mar. 05, 2012
USD ($)
|
May 31, 2018
USD ($)
|
Aug. 31, 2017
USD ($)
a
|
May 31, 2016
USD ($)
|
Jun. 30, 2013
USD ($)
|
Dec. 31, 2018
USD ($)
a
$ / shares
shares
|
Dec. 31, 2018
USD ($)
a
$ / shares
shares
|
Dec. 31, 2017
USD ($)
a
$ / shares
shares
|
Dec. 31, 2012
USD ($)
|
Dec. 17, 2018
USD ($)
|
Dec. 10, 2018
USD ($)
|
Sep. 30, 2018
a
|
Jul. 23, 2018
USD ($)
$ / shares
|
Jan. 31, 2018
USD ($)
|
Dec. 31, 2016
USD ($)
a
|
|
| Accretion of debt discount | $ 250,000 | $ 469,000 | |||||||||||||||||
| Loss on debt modification | (248,000) | ||||||||||||||||||
| Conversion of debt | 449,000 | $ 464,000 | |||||||||||||||||
| Number of shares issued for payments of note | shares | 665,000 | ||||||||||||||||||
| Area of land | a | 6,538 | 6,430 | |||||||||||||||||
| Beneficial conversion expense recognized | 82,000 | ||||||||||||||||||
| Investments | $ 2,289,000 | 2,289,000 | |||||||||||||||||
| Loss on debt extinguishment | $ (88,000) | $ 337,000 | |||||||||||||||||
| Mr. Wayne Harding [Member] | |||||||||||||||||||
| Debt borrowed | $ 15,000 | $ 2,500 | $ 2,500 | ||||||||||||||||
| McFinney Agri-Finance LLC [Member] | |||||||||||||||||||
| Debt instrument interest rate | 6.80% | ||||||||||||||||||
| Area of land | a | 2,579 | ||||||||||||||||||
| Land value | $ 1,250,000 | ||||||||||||||||||
| Payments to acquire land | 620,000 | ||||||||||||||||||
| Proceeds from other debt | 650,000 | ||||||||||||||||||
| Monthly payments of principal and interest | 4,238,000 | ||||||||||||||||||
| Notes payable, amount owed | 60,000 | ||||||||||||||||||
| Ellicot [Member] | |||||||||||||||||||
| Proceeds from other debt | $ 400,000 | ||||||||||||||||||
| GrowCo [Member] | |||||||||||||||||||
| Debt instrument interest rate | 22.50% | 50.00% | 50.00% | ||||||||||||||||
| Investors Fiduciary LLC [Member] | |||||||||||||||||||
| Debt instrument interest rate | 20.00% | 20.00% | |||||||||||||||||
| Bridge loan | $ 2,000,000 | ||||||||||||||||||
| Drawn on note | $ 551,000 | ||||||||||||||||||
| Unencumbered shares | shares | 2,456.5 | ||||||||||||||||||
| Shares issued price per share | $ / shares | $ 0.14 | $ 0.14 | $ 0.117 | ||||||||||||||||
| Minimum [Member] | |||||||||||||||||||
| Area of land | a | 35 | 35 | |||||||||||||||||
| Maximum [Member] | |||||||||||||||||||
| Area of land | a | 40 | 40 | |||||||||||||||||
| HCIC Seller Carryback Note [Member] | |||||||||||||||||||
| Debt instrument face amount | $ 5,214,000 | $ 6,164,000 | $ 7,364,000 | ||||||||||||||||
| Debt instrument interest rate | 6.00% | 6.00% | 6.00% | ||||||||||||||||
| Maturity date, description | extend the due date from June 30, 2016 to June 30, 2019 | due either August or September 2013 | March 31, 2013 through September 30, 2016 | ||||||||||||||||
| Maturity due date | Jun. 30, 2016 | Mar. 31, 2013 | |||||||||||||||||
| Debt instrument extended due date | Jun. 30, 2019 | Jun. 30, 2016 | Jun. 30, 2016 | ||||||||||||||||
| Percentage on increase decrease on principal balance | 5.00% | 20.00% | |||||||||||||||||
| Debt principal amount increased | $ 7,397,000 | ||||||||||||||||||
| Percentage on payment on principal amount | 5.43% | ||||||||||||||||||
| Debt amortized period | 12 years | 20 years | |||||||||||||||||
| Technical default on nonpayment of interest and principal | $ 6,323,000 | ||||||||||||||||||
| Conversion of debt | $ 3,181,000 | ||||||||||||||||||
| Warrant expire term | 5 years | ||||||||||||||||||
| Warrant exercise price | $ / shares | $ 3.00 | ||||||||||||||||||
| Warrant to purchase shares of common stock | shares | 1,367 | ||||||||||||||||||
| Fair value of warrants | $ 277,000 | ||||||||||||||||||
| HCIC Seller Carryback Note [Member] | Minimum [Member] | |||||||||||||||||||
| Convertible debt conversion price | $ / shares | $ 1.00 | ||||||||||||||||||
| HCIC Seller Carryback Note [Member] | Maximum [Member] | |||||||||||||||||||
| Convertible debt conversion price | $ / shares | $ 1.25 | ||||||||||||||||||
| Colorado Water Conservation Loan [Member] | |||||||||||||||||||
| Debt instrument face amount | $ 1,185,000 | ||||||||||||||||||
| Debt instrument interest rate | 2.50% | ||||||||||||||||||
| Debt amortized period | 20 years | ||||||||||||||||||
| Service fee | $ 12,000 | ||||||||||||||||||
| Additional amount paid towards loan | $ 210,000 | ||||||||||||||||||
| Area of land | a | 157 | ||||||||||||||||||
| Amount outstanding loan | $ 690,000 | $ 690,000 | $ 748,000 | ||||||||||||||||
| GrowCo Note [Member] | |||||||||||||||||||
| Debt instrument interest rate | 6.00% | 6.00% | |||||||||||||||||
| Maturity due date | Dec. 31, 2018 | ||||||||||||||||||
| Notes payable, amount owed | 390,000 | 390,000 | |||||||||||||||||
| Silverback Note [Member] | |||||||||||||||||||
| Loss on debt modification | $ 248,000 | ||||||||||||||||||
| Number of shares issued for payments of note | shares | 2,196,154 | ||||||||||||||||||
| Notes payable, amount owed | $ 203,000 | 203,000 | |||||||||||||||||
| Beneficial conversion expense recognized | 12,000 | ||||||||||||||||||
| Morningview Financial Convertible Note [Member] | |||||||||||||||||||
| Debt instrument face amount | $ 105,000 | ||||||||||||||||||
| Number of shares issued for payments of note | shares | 475,452 | ||||||||||||||||||
| Beneficial conversion expense recognized | $ 70,000 | ||||||||||||||||||
| Variable conversion price | 60.00% | ||||||||||||||||||
| El Paso Land Note [Member] | |||||||||||||||||||
| Debt instrument interest rate | 18.00% | 12.00% | |||||||||||||||||
| Maturity due date | Aug. 01, 2019 | ||||||||||||||||||
| Notes payable, amount owed | $ 269,000 | 269,000 | |||||||||||||||||
| Debt borrowed | $ 275,000 | ||||||||||||||||||
| Percentage on proceeds from sales | 25.00% | ||||||||||||||||||
| Payments of notes | $ 6,000 | ||||||||||||||||||
| El Paso Land Note [Member] | Mr. Wayne Harding [Member] | |||||||||||||||||||
| Investments | $ 50,000 | ||||||||||||||||||
| El Paso Land Note [Member] | Minimum [Member] | |||||||||||||||||||
| Area of land | a | 35 | ||||||||||||||||||
| El Paso Land Note [Member] | Maximum [Member] | |||||||||||||||||||
| Area of land | a | 40 | ||||||||||||||||||
| WRC Convertible Note [Member] | |||||||||||||||||||
| Debt instrument interest rate | 12.00% | ||||||||||||||||||
| Maturity due date | Apr. 01, 2020 | ||||||||||||||||||
| Convertible debt conversion price | $ / shares | $ 4.23 | ||||||||||||||||||
| Amount outstanding loan | $ 500,000 | ||||||||||||||||||
| Description on conversion | Tthe option of the holder, can be converted into one share of WRC preferred shares for each $4.23 of principal balance and accrued interest. | ||||||||||||||||||
| Butte Valley Land Notes [Member] | |||||||||||||||||||
| Debt instrument face amount | $ 200,000 | ||||||||||||||||||
| Debt instrument interest rate | 18.00% | ||||||||||||||||||
| Maturity due date | Nov. 11, 2018 | ||||||||||||||||||
| Percentage of crop share income payable | 50.00% | ||||||||||||||||||
| Butte Valley Land Notes [Member] | December 31, 2019 [Member] | |||||||||||||||||||
| Amount outstanding loan | $ 200,000 | ||||||||||||||||||
| OID Black Mountain Note [Member] | |||||||||||||||||||
| Debt instrument face amount | $ 330,000 | ||||||||||||||||||
| Number of shares issued for payments of note | shares | 900,000 | ||||||||||||||||||
| Gross cash paid | $ 300,000 | ||||||||||||||||||
| Loss on debt extinguishment | $ 89,000 | ||||||||||||||||||
Notes Payable - Schedule of Long Term Debt (Details) - USD ($) $ in Thousands |
12 Months Ended | |||||
|---|---|---|---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Aug. 31, 2017 |
Sep. 16, 2016 |
May 31, 2016 |
Dec. 31, 2012 |
|
| Principal balance | $ 9,335 | $ 19,107 | ||||
| Accrued Interest | 968 | |||||
| Less: note discounts | (63) | (450) | ||||
| Less: Current portion net of discount | (8,099) | (17,419) | ||||
| Long term portion | 1,173 | 1,238 | ||||
| McFinney Agri Finance [Member] | ||||||
| Principal balance | 60 | $ 441 | ||||
| Accrued Interest | ||||||
| Interest Rate | 6.80% | |||||
| Security | 2,400 acres of pasture land in Ellicott Colorado | 2,400 acres of pasture land in Ellicott Colorado | ||||
| Less: note discounts | ||||||
| HCIC Seller Carryback Note [Member] | ||||||
| Principal balance | 6,323 | $ 6,301 | ||||
| Accrued Interest | $ 742 | |||||
| Interest Rate | 6.00% | 6.00% | 6.00% | |||
| Security | Shares in the Mutual Ditch Company | Shares in the Mutual Ditch Company | ||||
| Less: note discounts | ||||||
| CWCB Note [Member] | ||||||
| Principal balance | 690 | $ 748 | ||||
| Accrued Interest | ||||||
| Interest Rate | 2.50% | |||||
| Security | Certain Orlando and Farmland assets | Certain Orlando and Farmland assets | ||||
| Less: note discounts | ||||||
| GrowCo Note [Member] | ||||||
| Principal balance | 390 | |||||
| Accrued Interest | $ 12 | |||||
| Interest Rate | 6.00% | 6.00% | ||||
| Security | None | None | ||||
| Less: note discounts | ||||||
| GrowCo $4M Notes [Member] | ||||||
| Principal balance | $ 4,000 | |||||
| Accrued Interest | ||||||
| Interest Rate | 22.50% | |||||
| Security | Various land and water assets | Various land and water assets | ||||
| Less: note discounts | ||||||
| GrowCo $1.5M Exchange Note [Member] | ||||||
| Principal balance | $ 100 | |||||
| Accrued Interest | ||||||
| Interest Rate | 22.50% | |||||
| Security | Various land and water assets | Various land and water assets | ||||
| Less: note discounts | ||||||
| GrowCo $6M Exchange Note [Member] | ||||||
| Principal balance | $ 1,855 | |||||
| Accrued Interest | ||||||
| Interest Rate | 22.50% | |||||
| Less: note discounts | ||||||
| GrowCo $7M Exchange Note [Member] | ||||||
| Principal balance | $ 3,132 | |||||
| Accrued Interest | ||||||
| Less: note discounts | ||||||
| GrowCo $7M Exchange Note [Member] | Minimum [Member] | ||||||
| Interest Rate | 10.00% | |||||
| GrowCo $7M Exchange Note [Member] | Maximum [Member] | ||||||
| Interest Rate | 22.50% | |||||
| GrowCo $2M Exchange Note [Member] | ||||||
| Principal balance | $ 1,520 | |||||
| Accrued Interest | ||||||
| Less: note discounts | ||||||
| GrowCo $2M Exchange Note [Member] | Minimum [Member] | ||||||
| Interest Rate | 10.00% | |||||
| GrowCo $2M Exchange Note [Member] | Maximum [Member] | ||||||
| Interest Rate | 22.50% | |||||
| Bridge loan Harding [Member] | ||||||
| Principal balance | 15 | $ 13 | ||||
| Accrued Interest | ||||||
| Interest Rate | 18.00% | |||||
| Security | Potential conversion into Ellicott Land security | Potential conversion into Ellicott Land security | ||||
| Less: note discounts | ||||||
| Powderhorn/Silverback Convertible Note [Member] | ||||||
| Principal balance | 203 | |||||
| Accrued Interest | $ 2 | |||||
| Interest Rate | 12.00% | |||||
| Security | Third lien on Ellicott land | Third lien on Ellicott land | ||||
| Less: note discounts | $ (13) | |||||
| Morningview Financial Note [Member] | ||||||
| Principal balance | 75 | |||||
| Accrued Interest | $ 7 | |||||
| Interest Rate | 18.00% | |||||
| Security | Unsecured | Unsecured | ||||
| Less: note discounts | $ (50) | |||||
| El Paso Land Note [Member] | ||||||
| Principal balance | 271 | $ 275 | ||||
| Accrued Interest | $ 56 | |||||
| Interest Rate | 12.00% | 18.00% | ||||
| Security | Second lien on Ellicott land | Second lien on Ellicott land | ||||
| Less: note discounts | ||||||
| WRC Convertible Note [Member] | ||||||
| Principal balance | 500 | $ 300 | ||||
| Accrued Interest | $ 67 | |||||
| Interest Rate | 12.00% | |||||
| Security | Lien on water supply agreement | Lien on water supply agreement | ||||
| Less: note discounts | ||||||
| Butte Valley Land Notes [Member] | ||||||
| Principal balance | 200 | |||||
| Accrued Interest | $ 47 | |||||
| Interest Rate | 18.00% | |||||
| Security | Butte Valley Land | Butte Valley Land | ||||
| Less: note discounts | ||||||
| Equipment Loans [Member] | ||||||
| Principal balance | 57 | $ 122 | ||||
| Accrued Interest | $ 3 | |||||
| Security | Equipment | Equipment | ||||
| Less: note discounts | ||||||
| Equipment Loans [Member] | Minimum [Member] | ||||||
| Interest Rate | 5.00% | |||||
| Equipment Loans [Member] | Maximum [Member] | ||||||
| Interest Rate | 8.00% | |||||
| Black Mountain [Member] | ||||||
| Principal balance | $ 300 | |||||
| Accrued Interest | ||||||
| Interest Rate | 12.00% | |||||
| Security | Unsecured | Unsecured | ||||
| Less: note discounts | ||||||
| Investors Fiduciary LLC [Member] | ||||||
| Principal balance | 551 | |||||
| Accrued Interest | $ 32 | |||||
| Interest Rate | 0.00% | |||||
| Security | Shares of HCIC | Shares of HCIC | ||||
| Less: note discounts | ||||||
Notes Payable - Schedule of Long Term Debt (Details) (Parenthetical) - a |
Dec. 31, 2018 |
Sep. 30, 2018 |
Dec. 31, 2017 |
|---|---|---|---|
| Acres of pasture land | 6,430 | 6,538 | |
| McFinney Agri-Finance Note [Member] | |||
| Acres of pasture land | 2,400 | 2,400 |
Notes Payable - Schedule of Current Portion Long Term Debt (Details) $ in Thousands |
Dec. 31, 2018
USD ($)
|
|---|---|
| Current portion long term debt: Total | $ 8,162 |
| Less discount | (63) |
| Total | 8,099 |
| HCIC seller carry back [Member] | |
| Current portion long term debt: Total | 6,323 |
| CWCB [Member] | |
| Current portion long term debt: Total | 54 |
| McFinney Agri Finance [Member] | |
| Current portion long term debt: Total | 60 |
| Harding Bridge Loan [Member] | |
| Current portion long term debt: Total | 15 |
| Powderhorn Note [Member] | |
| Current portion long term debt: Total | 203 |
| Morningview Note [Member] | |
| Current portion long term debt: Total | 75 |
| GrowCo Note [Member] | |
| Current portion long term debt: Total | 390 |
| Investor Land Notes [Member] | |
| Current portion long term debt: Total | 271 |
| Equipment loans [Member] | |
| Current portion long term debt: Total | 20 |
| Butte Valley Land Notes [Member] | |
| Current portion long term debt: Total | 200 |
| Investors Fiduciary Notes [Member] | |
| Current portion long term debt: Total | $ 551 |
Notes Payable - Schedule of Principal Payment (Details) $ in Thousands |
Dec. 31, 2018
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| 2019 | $ 8,162 |
| 2020 | 576 |
| 2021 | 75 |
| 2022 | 61 |
| 2023 & Beyond | 461 |
| Total | $ 9,335 |
Information on Business Segments - Schedule of Operating Results by Segment (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Revenue | $ 66 | $ 692 |
| Less: direct cost of revenue | 33 | |
| Gross Margin | 66 | 659 |
| Total Operating Expenses | (6,493) | (9,729) |
| Total Other Income (Expense) | 10,952 | (2,583) |
| Net (Loss) from Operations Before Income Taxes | 4,525 | (11,653) |
| Income Taxes (Expense)/Credit | ||
| Net (Loss) from Operations | 4,525 | (11,653) |
| Net (Loss) from Discontinued Operations | (810) | (1,045) |
| Preferred dividends | (1,008) | (863) |
| Non-controlling interest | 7 | 637 |
| Net (Loss) | 2,714 | (12,924) |
| Segment Assets | 30,659 | 38,152 |
| Parent (Two Rivers) [Member] | ||
| Revenue | 18 | |
| Less: direct cost of revenue | ||
| Gross Margin | 18 | |
| Total Operating Expenses | (2,873) | (752) |
| Total Other Income (Expense) | 11,470 | (530) |
| Net (Loss) from Operations Before Income Taxes | 8,615 | (1,282) |
| Income Taxes (Expense)/Credit | ||
| Net (Loss) from Operations | 8,615 | (1,282) |
| Net (Loss) from Discontinued Operations | ||
| Preferred dividends | (986) | (369) |
| Non-controlling interest | 7 | |
| Net (Loss) | 7,636 | (1,651) |
| Segment Assets | 10,530 | 766 |
| Farms (DFP) [Member] | ||
| Revenue | ||
| Less: direct cost of revenue | ||
| Gross Margin | ||
| Total Operating Expenses | ||
| Total Other Income (Expense) | ||
| Net (Loss) from Operations Before Income Taxes | ||
| Income Taxes (Expense)/Credit | ||
| Net (Loss) from Operations | ||
| Net (Loss) from Discontinued Operations | (1,045) | |
| Preferred dividends | ||
| Non-controlling interest | ||
| Net (Loss) | (1,045) | |
| Segment Assets | ||
| Greenhouse (GrowCo., GCP1, GCP2) [Member] | ||
| Revenue | 620 | |
| Less: direct cost of revenue | ||
| Gross Margin | 620 | |
| Total Operating Expenses | (501) | |
| Total Other Income (Expense) | (2,016) | |
| Net (Loss) from Operations Before Income Taxes | (1,897) | |
| Income Taxes (Expense)/Credit | ||
| Net (Loss) from Operations | (1,897) | |
| Net (Loss) from Discontinued Operations | (810) | |
| Preferred dividends | (478) | |
| Non-controlling interest | 644 | |
| Net (Loss) | (810) | (1,731) |
| Segment Assets | 9,433 | |
| Water (TR Cap) [Member] | ||
| Revenue | 48 | 72 |
| Less: direct cost of revenue | 33 | |
| Gross Margin | 48 | 39 |
| Total Operating Expenses | (3,620) | (8,145) |
| Total Other Income (Expense) | (518) | (368) |
| Net (Loss) from Operations Before Income Taxes | (4,090) | (8,474) |
| Income Taxes (Expense)/Credit | ||
| Net (Loss) from Operations | (4,090) | (8,474) |
| Net (Loss) from Discontinued Operations | ||
| Preferred dividends | (22) | (16) |
| Non-controlling interest | (7) | |
| Net (Loss) | (4,112) | (8,497) |
| Segment Assets | $ 20,129 | $ 27,953 |
Equity Transactions (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares issued | 45,574,458 | 32,749,920 |
| Number of common shares issued for debt | 665,000 | |
| Number of common shares issued for debt, value | $ 449 | $ 464 |
| Loss on stock issuance | (88) | |
| Loss on debt modification | (248) | |
| Number of warrants exercises | 1,417,000 | |
| Number of options extended | 600,000 | |
| Warrants [Member] | ||
| Warrant expense | 50 | $ 331 |
| 2011 and 2005 Plans [Member] | ||
| Stock options expense recognized | 888 | $ 467 |
| Maximum [Member] | ||
| Stock options strike price | $ 1.25 | |
| Minimum [Member] | ||
| Stock options strike price | $ 0.70 | |
| Three Individuals [Member] | ||
| Loss on stock issuance | $ 2 | |
| Number of common stock shares issued | 14,900 | |
| 2018 and 2019 [Member] | ||
| Number of options extended expiration description | Due to expire in 2016 and 2017 to expiration dates in 2018 and 2019 | |
| Stock options expense recognized | $ 52 | |
| 2021 and 2022 [Member] | ||
| Number of options extended expiration description | Expiration to occur in 2021 and 2022 | |
| Stock options expense recognized | $ 85 | |
| Restricted Stock Units (RSUs) [Member] | ||
| Number of restricted stock units | 118,000 | 139,000 |
| Spotfin Funding [Member] | ||
| Number of shares issued for services | 1,090,957 | |
| TR Capital Partners, LLC [Member] | ||
| Shares issued for conversion | 14,840 | |
| Number of common shares issued for preferred stock conversion | 52,260 | |
| TR Capital Partners, LLC [Member] | Investor [Member] | ||
| Loss on stock issuance | ||
| Number of common stock shares issued | 139,985 | |
| Investor Relations Firm [Member] | ||
| Loss on stock issuance | $ 34 | |
| Number of common stock shares issued | 200,000 | |
| Investor Relations Services [Member] | ||
| Number of shares issued for services | 25,200 | |
| Black Mountain [Member] | ||
| Number of common shares issued for debt | 874,250 | |
| Number of common shares issued for debt, value | $ 100 | |
| Loss on stock issuance | 29 | |
| Potential Equity Loans [Member] | ||
| Loss on stock issuance | $ 1,632 | |
| Shares issued price per share | $ 0.247 | |
| Potential Equity Loans [Member] | In 2019 [Member] | ||
| Shares issued for conversion | 6,800,000 | |
| Powderhorn/Silverback Convertible Note [Member] | ||
| Number of common shares issued for debt | 2,196,154 | |
| Loss on debt modification | $ 248 | |
| Black Mountain [Member] | ||
| Number of common shares issued for debt | 900,000 | |
| Number of common shares issued for debt, value | $ 138 | |
| Loss on stock issuance | $ 60 | |
| Morningview Note [Member] | ||
| Number of common shares issued for debt | 475,452 | |
| Loss on stock issuance | ||
Equity Transactions - Schedule of Stock Options Issued and Outstanding (Details) - $ / shares |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
Dec. 31, 2016 |
|
| 2005 Plan [Member] | |||
| Options | 600,000 | 600,000 | 1,989,867 |
| Exercise Price | $ 0.70 | $ 0.70 | $ 1.25 |
| 2005 Plan [Member] | Consultant [Member] | |||
| Options | 600,000 | ||
| Date of Grant | Various | ||
| Vesting Date | Various | ||
| Performance Requirement | Satisfied | ||
| Expiration Date | Various | ||
| Exercise Price | $ 0.70 | ||
| Exercised to Date | |||
| 2011 Plan [Member] | |||
| Options | 2,279,215 | ||
| 2011 Plan [Member] | CEO [Member] | |||
| Options | 825,000 | ||
| Date of Grant | Various | ||
| Vesting Date | Various | ||
| Performance Requirement | Ongoing | ||
| Expiration Date | 2026-2017 | ||
| Exercise Price, description | Variable | ||
| Exercised to Date | |||
| 2011 Plan [Member] | Director [Member] | |||
| Options | 1,173,215 | ||
| Date of Grant | Various | ||
| Vesting Date | Various | ||
| Performance Requirement | Satisfied | ||
| Expiration Date | Various | ||
| Exercise Price | $ 0.53 | ||
| Exercised to Date | |||
| 2011 Plan [Member] | Employees [Member] | |||
| Options | 131,000 | ||
| Date of Grant | Various | ||
| Vesting Date | Various | ||
| Performance Requirement | Ongoing | ||
| Expiration Date | Jun-’26 | ||
| Exercise Price | $ 0.53 | ||
| Exercised to Date | |||
| 2011 Plan [Member] | Others [Member] | |||
| Options | 150,000 | ||
| Date of Grant | Various | ||
| Vesting Date | Various | ||
| Performance Requirement | Satisfied | ||
| Expiration Date | Various | ||
| Exercise Price, description | Variable | ||
| Exercised to Date |
Equity Transactions - Summary of Stock Option Plan (Details) - $ / shares |
12 Months Ended | ||||
|---|---|---|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
||||
| 2005 Plan [Member] | |||||
| Shares Outstanding, beginning balance | 600,000 | 1,989,867 | |||
| Shares Outstanding, Granted | 600,000 | [1] | |||
| Shares Outstanding, Cancelled | (600,000) | [1] | |||
| Shares Outstanding, Expired | (1,389,867) | ||||
| Shares Outstanding, Exercised | |||||
| Shares Outstanding, ending balance | 600,000 | 600,000 | |||
| Shares Outstanding, Options Exercisable | 600,000 | ||||
| Weighted Average Exercise Price, beginning balance | $ 0.70 | $ 1.25 | |||
| Weighted Average Exercise Price, Granted | 0.70 | [1] | |||
| Weighted Average Exercise Price, Cancelled | 1.25 | [1] | |||
| Weighted Average Exercise Price, Expired | 1.25 | ||||
| Weighted Average Exercise Price, Exercised | |||||
| Weighted Average Exercise Price, ending balance | 0.70 | $ 0.70 | |||
| Weighted Average Exercise Price, Options Exercisable | $ 0.70 | ||||
| 2011 Long-Term Stock Incentive Plan [Member] | |||||
| Shares Outstanding, beginning balance | 3,247,540 | 4,173,448 | |||
| Shares Outstanding, Granted | 1,211,500 | ||||
| Shares Outstanding, Cancelled | (779,285) | (1,993,948) | |||
| Shares Outstanding, Expired | (178,500) | (25,000) | |||
| Shares Outstanding, Exercised | (118,500) | ||||
| Shares Outstanding, ending balance | 2,289,755 | 3,247,540 | |||
| Shares Outstanding, Options Exercisable | 1,618,357 | ||||
| |||||
Equity Transactions - Summary of Stock Option Plan (Details) (Parenthetical) - 2005 Plan [Member] |
12 Months Ended |
|---|---|
|
Dec. 31, 2017
$ / shares
shares
| |
| Number of options extended and repriced | shares | 600,000 |
| Minimum [Member] | |
| Options extended and repriced, weighted average exercise price | $ 0.70 |
| Maximum [Member] | |
| Options extended and repriced, weighted average exercise price | $ 1.25 |
Equity Transactions - Schedule of Fair Value of Options (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Equity [Abstract] | ||
| Expected stock price volatility | 224.00% | 142.00% |
| Risk-free interest rate | 1.30% | 0.83% |
| Expected option life (years) | 5 years | 5 years |
| Expected annual dividend yield | 0.00% | 0.00% |
Equity Transactions - Schedule of Warrants Outstanding (Details) |
12 Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
|
Dec. 31, 2018
$ / shares
shares
| ||||||||
| Grantee | TWO RIVERS WATER & FARMING Co | |||||||
| Warrant One [Member] | ||||||||
| Grantee | Investor Group | |||||||
| Company Relationship | Investors | |||||||
| Shares | 300,000 | |||||||
| Date of Grant | Feb-12 | |||||||
| Vesting Date | Mar-12 | |||||||
| Expiration Date | [1] | |||||||
| Exercise Price | $ / shares | $ 1.00 | |||||||
| Warrant Two [Member] | ||||||||
| Grantee | TR Capital Partners preferred members | |||||||
| Company Relationship | Investors | |||||||
| Shares | 14,168,944 | |||||||
| Date of Grant | Jul-05 | |||||||
| Vesting Date | Jul-05 | |||||||
| Expiration Date | Jan-19 | |||||||
| Exercise Price | $ / shares | $ 2.10 | |||||||
| Warrant Three [Member] | ||||||||
| Grantee | GrowCo Exchange Note | |||||||
| Company Relationship | Creditor | |||||||
| Shares | 700,000 | |||||||
| Date of Grant | Apr-16 | |||||||
| Vesting Date | Apr-16 | |||||||
| Expiration Date | May-21 | |||||||
| Exercise Price | $ / shares | $ 0.50 | |||||||
| Warrant Four [Member] | ||||||||
| Grantee | Wellington Shields | |||||||
| Company Relationship | Financial Advisor | |||||||
| Shares | 15,000 | |||||||
| Date of Grant | Apr-17 | |||||||
| Vesting Date | Apr-17 | |||||||
| Expiration Date | Apr-22 | |||||||
| Exercise Price | $ / shares | $ 0.58 | |||||||
| Warrant Five [Member] | ||||||||
| Grantee | Black Mountain | |||||||
| Company Relationship | Creditor | |||||||
| Shares | 390,634 | |||||||
| Date of Grant | Apr-17 | |||||||
| Vesting Date | Apr-17 | |||||||
| Expiration Date | Apr-22 | |||||||
| Exercise Price | $ / shares | $ 0.27 | |||||||
| Warrant Six [Member] | ||||||||
| Grantee | El Paso Land note holders | |||||||
| Company Relationship | Creditor | |||||||
| Shares | 275,000 | |||||||
| Date of Grant | Aug-17 | |||||||
| Vesting Date | Aug-17 | |||||||
| Expiration Date | Aug-22 | |||||||
| Exercise Price | $ / shares | $ 0.35 | |||||||
| Warrant Seven [Member] | ||||||||
| Grantee | Black Mountain | |||||||
| Company Relationship | Creditor | |||||||
| Shares | 146,000 | |||||||
| Date of Grant | Sep-17 | |||||||
| Vesting Date | Sep-17 | |||||||
| Expiration Date | Sep-22 | |||||||
| Exercise Price | $ / shares | $ 1.00 | |||||||
| Warrant Eight [Member] | ||||||||
| Grantee | Wellington Shields | [2] | ||||||
| Company Relationship | Financial Advisor | [2] | ||||||
| Shares | 42,318 | [2] | ||||||
| Date of Grant | Feb-18 | [2] | ||||||
| Vesting Date | Feb-18 | [2] | ||||||
| Expiration Date | Feb-23 | [2] | ||||||
| Exercise Price | $ / shares | $ 0.32 | [2] | ||||||
| Warrant Nine [Member] | ||||||||
| Grantee | Powderhorn | [3] | ||||||
| Company Relationship | Creditor | [3] | ||||||
| Shares | 1,500,000 | [3] | ||||||
| Date of Grant | May-18 | [3] | ||||||
| Vesting Date | May-18 | [3] | ||||||
| Expiration Date | May-21 | [3] | ||||||
| Exercise Price | $ / shares | $ 0.35 | [3] | ||||||
| Warrants [Member] | ||||||||
| Shares | 17,537,896 | |||||||
| ||||||||
Equity Transactions - Schedule of Warrants Outstanding (Details) (Parenthetical) - Warrant Nine [Member] $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2018
USD ($)
| |
| Amortization of debt expense | $ 229 |
| Debt expense amortized period | 3 years |
Income Taxes (Details Narrative) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Income tax rate description | On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on previously deferred foreign income. | |
| Statutory federal income tax rate, percentage | 21.00% | |
| Deferred tax asset, change in net operating loss | $ 6,500 | |
| Deferred tax asset, change in valuation allowance | 6,500 | |
| Deferred tax asset | 14,763 | $ 18,339 |
| Deferred tax asset, valuation allowance | $ (14,763) | $ (18,339) |
| Net operating loss carryforward, description | The net operating loss carryforward, if not used, will begin to expire in 2029 |
Income Taxes - Schedule of Taxable Income (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Book loss | $ 2,714 | $ (12,924) |
| Stock Based Comp | 1,306 | 956 |
| Stock Comp Exercised | 32 | |
| Impairments | 6,900 | |
| Capital Expenses | 2,964 | 1,032 |
| Meals & Entertainment | 0 | |
| Warrant Expense | 50 | 331 |
| Gain on deconsolidation | (12,773) | |
| Loss on disposal on debt modification | 336 | |
| Depreciation | 91 | (617) |
| Amortization | (14) | |
| Estimate of taxable income | $ (5,280) | $ 4,425 |
Income Taxes - Schedule of Components of Deferred Tax Assets (Details) - USD ($) $ in Thousands |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Net operating loss carryforwards | $ (13,124) | $ (18,309) |
| Capital loss | (6) | (10) |
| Bargain purchase | 417 | 643 |
| RSU & stock option expense | (1,835) | (2,349) |
| Fixed Assets and Intangibles | (212) | (327) |
| Charitable Contributions | (3) | (5) |
| Bad Debt | ||
| Total cumulative deferred tax assets | (14,763) | (18,339) |
| Valuation allowance | 14,763 | 18,339 |
| Effective income tax asset |
Income Taxes - Schedule of Income Tax Provision (Details) - USD ($) $ in Thousands |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Income Tax Disclosure [Abstract] | ||
| Current expense (benefit), federal | ||
| Current expense (benefit), state | ||
| Total current | ||
| Deferred expense (benefit), federal | (3,992) | (4,600) |
| Deferred expense (benefit), state | (570) | (414) |
| Total deferred | (4,562) | (5,014) |
| Less: Valuation allowance | 4,562 | 5,014 |
| Total | ||
Income Taxes - Summary of Net Operating Loss Carryforward (Details) - USD ($) $ in Thousands |
Dec. 31, 2018 |
Dec. 31, 2017 |
|---|---|---|
| Income Tax Disclosure [Abstract] | ||
| Operating loss carry forward - Federal | $ 5,280 | $ 48,460 |
| Operating loss carry forward - Colorado | $ 5,280 | $ 49,460 |
Going Concern (Details Narrative) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Net profit (loss) attributable to common shareholders | $ 2,714,000 | $ (12,924,000) |
| Net cash used in operating activities | 1,060,000 | 2,898,000 |
| Working capital deficit | 20,228,000 | |
| Accumulated deficit | (94,454,000) | $ (97,168,000) |
| December 31, 2018 to March 31, 2019 [Member] | ||
| Proceeds from long-term debt | 60,000 | |
| December 31, 2018 to March 31, 2019 [Member] | El Paso Land Properties [Member] | ||
| Proceeds from long-term debt | 47,000 | |
| December 31, 2018 to March 31, 2019 [Member] | Mr. Wayne Harding [Member] | ||
| Proceeds from long-term debt | $ 2,500 | |
Commitments and Contingencies (Details Narrative) |
1 Months Ended | 12 Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|---|
|
Jan. 19, 2018
USD ($)
|
Aug. 08, 2017
USD ($)
|
Feb. 28, 2017
USD ($)
a
|
Jan. 31, 2016
USD ($)
a
|
Dec. 31, 2018
USD ($)
|
Dec. 31, 2017
USD ($)
a
|
Dec. 31, 2015
USD ($)
a
|
Sep. 30, 2018
a
|
Sep. 16, 2016 |
|
| Area of land | a | 6,538 | 6,430 | |||||||
| Repayments of notes payable | $ 542,000 | $ 1,560,000 | |||||||
| Promissory note | 9,335,000 | $ 19,107,000 | |||||||
| 2016 Agreement [Member] | |||||||||
| Accrued liability to cover the cost of deconstruction and penalties and fines | $ 1,800,000 | ||||||||
| GrowCo [Member] | |||||||||
| Debt instrument interest rate | 50.00% | 22.50% | |||||||
| Promissory note | $ 2,115,000 | ||||||||
| Guaranteed debt amount | 4,000,000 | ||||||||
| Debt collateral amount | $ 2,359,000 | ||||||||
| Debt collateral, percentage | 100.00% | ||||||||
| Debt contingent liability | $ 2,359,000 | ||||||||
| Colorado Centre LLC [Member] | |||||||||
| Area of land | a | 1,775 | ||||||||
| Monthly payments on operating lease | $ 3,900 | ||||||||
| Lease termination date | Jun. 30, 2018 | ||||||||
| Penalty amount | $ 24,000 | ||||||||
| Parker Road Campus, LLC [Member] | |||||||||
| Area of land | a | 1,554 | ||||||||
| Monthly payments on operating lease | $ 2,201 | ||||||||
| Lease termination date | Mar. 31, 2020 | ||||||||
| Ryley Carlock & Applewhite [Member] | |||||||||
| Attorneys' fees owed for services rendered | $ 139,000 | ||||||||
| Accounts payable | $ 139,000 | ||||||||
| GrowCo $4 Notes [Member] | |||||||||
| Debt instrument face amount | $ 4,000,000 | ||||||||
| Area of land | a | 40 | ||||||||
| Debt instrument interest rate | 22.50% | ||||||||
| Maturity due date | Apr. 01, 2020 | ||||||||
| Blue & Green, LLC [Member] | |||||||||
| Repayments of notes payable | $ 4,000,000 | ||||||||
| Promissory note | 2,115,000 | ||||||||
| Interest on debt | $ 300,000 | ||||||||
Commitments and Contingencies - Schedule of Lease Amount Due at Base Rate (Details) $ in Thousands |
Dec. 31, 2018
USD ($)
|
|---|---|
| Commitments and Contingencies Disclosure [Abstract] | |
| 2019 | $ 28 |
| 2020 | 7 |
| 2021 |
Related Party Transactions (Details Narrative) - USD ($) |
Dec. 10, 2018 |
Dec. 17, 2018 |
Dec. 02, 2018 |
Jan. 31, 2018 |
Aug. 31, 2017 |
|---|---|---|---|---|---|
| Mr. Wayne Harding [Member] | |||||
| Due to related parties | $ 50,000 | ||||
| Short-term loan | $ 2,500 | $ 15,000 | $ 2,500 | ||
| Loan, interest rate | 12.00% | ||||
| Board of Directors [Member] | |||||
| Due to related parties | $ 44,800 | ||||
| Repayment of debt | $ 600 | ||||
| Messrs [Member] | |||||
| Due to related parties | 6,400 | ||||
| Harding [Member] | |||||
| Due to related parties | 6,400 | ||||
| Morris [Member] | |||||
| Due to related parties | 6,400 | ||||
| Wiggins [Member] | |||||
| Due to related parties | 6,400 | ||||
| Bragg [Member] | |||||
| Due to related parties | 6,400 | ||||
| Harnish [Member] | |||||
| Due to related parties | 6,400 | ||||
| Cochran [Member] | |||||
| Due to related parties | $ 6,400 |
Subsequent Events (Details Narrative) - USD ($) |
3 Months Ended | 12 Months Ended | ||||
|---|---|---|---|---|---|---|
Apr. 10, 2019 |
Mar. 06, 2019 |
Jan. 30, 2019 |
Mar. 31, 2019 |
Dec. 31, 2018 |
Dec. 31, 2017 |
|
| Repayments of notes payable | $ 542,000 | $ 1,560,000 | ||||
| Number of common shares issued for debt | 665,000 | |||||
| Subsequent Event [Member] | ||||||
| Proceeds from notes payable | $ 100,000 | |||||
| Subsequent Event [Member] | Investor Relations Firm [Member] | ||||||
| Number of common shares issued for debt | 555,555 | |||||
| Subsequent Event [Member] | Investors Fiduciary Note [Member] | ||||||
| Proceeds from notes payable | $ 60,000 | |||||
| Subsequent Event [Member] | Powderhorn/Silverback Note [Member] | ||||||
| Number of common shares issued for debt | 3,040,350 | |||||
| Subsequent Event [Member] | Morningview Financial Note [Member] | ||||||
| Number of common shares issued for debt | 1,179,817 | |||||
| Subsequent Event [Member] | Independent Board Member One [Member] | ||||||
| Number of options granted | 250,000 | |||||
| Subsequent Event [Member] | Independent Board Member Two [Member] | ||||||
| Number of options granted | 250,000 | |||||
| Subsequent Event [Member] | Independent Board Member Three [Member] | ||||||
| Number of options granted | 250,000 | |||||
| Subsequent Event [Member] | Mr. Wayne Harding [Member] | ||||||
| Repayments of notes payable | $ 2,500 | |||||