NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three and Six Months Ended June 30, 2019 and June 30, 2018
(Unaudited)
NOTE
1 – ORGANIZATION AND BUSINESS
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 March 31, 2019,
we own approximately 7,076 gross acres. Gross acres owned showed a net increase of 646 acres from 6,430 gross acres at December
31, 2018 due the addition of 1,000 acres owned by Huerfano Cucharas Irrigation Company that was previously not reported netted
by the elimination of 354 acres from the deconsolidation of GrowCo.
We
are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets
and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. Our water asset area spans
over 1,900 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of
Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along
the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water
contained therein and serve the community while providing returns to our investors.
Since
October 2016, we have refocused on monetizing our assets through asset sales and reinvestment. 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
we believe will. We plan to 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 June 30, 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 facilitate the raising of additional 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 Redevelopment’s first area of focus is in the Huerfano-Cucharas river basin in southeastern
Colorado.
Vaxa
Entities
On
July 31, 2019, Two Rivers completed its acquisition of a 100% interest in Vaxa Global, LLC and its two subsidiaries Ekstrak Labs,
LLC and Gramz Holdings, LLC (together the “Vaxa Entities”) from Easby Land & Cattle Company, LLC, in exchange
for 30,000,000 Two Rivers’ common shares plus an additional 20,000,000 Two Rivers’ common shares subject to an earn-out
performance by the Vaxa Entities over a 12 month period.
Vaxa
Global, LLC
Vaxa
Global, LLC farms and distributes Canadian originated patented-processed hemp for biomass sale and CBD extraction within the United
States to states that are approved to extract CBD. Vaxa hemp is 100% organic, non-GMO, solvent free, THC free and 100% food-grade
edible. Vaxa originated from one of the first industrial hemp distributors/farmers/manufactures in Canada into the US.
Ekstrak
Labs, LLC
Ekstrak
Labs, LLC is an emerging company in isolate extraction. Eskstrak plans to build state-of-the-art facilities with machinery that
is proven to deliver optimal extraction results. Eskstrak is developing joint venture partnerships for brand diversification into
various products and creating product lines for affiliated brands through white label wholesale products.
Gramz
Holdings, LLC
Gramz
Holdings, LLC is a supplier of Nature’s Whole Spectrum™, natural whole plant compounds in consumer products designed
to maintain the composition of the plant’s natural source and state. Gramz™ was founded to respect the potential medicinal
and therapeutic value of hemp’s whole plant composition. Gramzs™ products include Gramz Whole Plant Matrix™
Sublingual Drops and Gramz Herbal Topical, with R&D in progress for additional products for both humans and pets.
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 subsidiaries: 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.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S.
GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information
not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results
for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year
ended December 31, 2019. It is suggested that these condensed consolidated financial statements be read in conjunction with the
Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 15, 2019.
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:
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, during the year ended December 31, 2018 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.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
Entity
|
|
June
30, 2019
|
|
|
Dec
31, 2018
|
|
TR Capital
|
|
$
|
20,342,000
|
|
|
$
|
20,342,000
|
|
HCIC
|
|
|
1,379,000
|
|
|
|
1,379,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
Total
|
|
$
|
22,364,000
|
|
|
$
|
22,364,000
|
|
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 condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, Two Rivers considers cash and cash equivalents to include highly liquid investments with original
maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in
interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial
instruments.
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.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset, which ranges from three to twenty-seven and a half years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the
related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged
to income.
Below
is a summary of premises and equipment:
Asset
Type
|
|
Life
in Years
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Office equipment, furniture
|
|
5 –
7
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
Computers
|
|
3
|
|
|
|
46,000
|
|
|
|
46,000
|
|
Vehicles
|
|
5
|
|
|
|
9,000
|
|
|
|
25,000
|
|
Farm equipment
|
|
7 – 10
|
|
|
|
147,000
|
|
|
|
147,000
|
|
Buildings
|
|
27.5
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Website
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
231,000
|
|
|
|
247,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
(221,000
|
)
|
|
|
(227,000
|
)
|
Net book value
|
|
|
|
|
$
|
10,000
|
|
|
$
|
20,000
|
|
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. For the
three months ended June 30, 2019, we sold two lots totaling 78 acres for a gross sales price of $116,000, recognized
a gain of approximately $68,000. This transaction provided cash of approximately $47,000, paid in full the first mortgage
of the el Paso land note for approximately $58,000, and direct expenses of sale of approximately $11,000.
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 compare 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.
For
the year ended December 31, 2018 and the six months ended June 30, 2019, the Company did not recognize any impairments.
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 three and six months ended
June 30, 2019 and 2018.
Farming
For
the three and six months ended June 30, 2019 the Company had approximately $0 in net crop share revenues. For the three and six
months ended June 30, 2018, the Company recognized approximately $0 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 three and six months ending June 30, 2019, the Company had approximately $0 in other revenues from grazing leases and member
assessments. For the three and six months ending June 30, 2018, the Company had approximately $0 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 second 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.
Dam
Demolition Expense
During
the year ended December 31, 2018 a court date has been set for a hearing of the State of Colorado’s legal action to compel
the Company to demolish Cucharas #5 reservoir. A contingent liability, with an offsetting expense of $1,800,000 has been recognized.
In July, 2019, the Company reached a settlement with the State of Colorado, whereby the Company will pay approximately $922,000
plus interest to the State of Colorado in exchange for a full settlement of the above legal action. The Company anticipates recognizing
a reduction of this contingent liability from $1,800,000 to approximately $922,000, along with additional non-cash gains of approximately
$50,000 from the negotiations and resolution of previously recorded accounts payable, on Two Rivers’ financial reports dated
September 30, 2019.
Debt
and Equity
The
Company follows beneficial conversion feature guidance in ASC 470-20, which applies to convertible stock as well as convertible
debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment
date. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the
intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting
discount is amortized as interest over the life of the instrument, if a stated maturity date exists, or to the earliest conversion
date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the expense must be recognized
at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price
may trigger the recognition of an additional beneficial conversion feature on occurrence.
On
May 21, 2019, the Company entered into a convertible promissory note with an investor of the Company in the amount of $262,500.
The note bears 10% interest and is payable in full on May 21, 2020. The Company has recorded a beneficial conversion feature of
$258,000, which is recorded as a discount on the note payable and being amortized over the life of the note. As of June 30, 2019
the balance of the beneficial conversion feature is approximately $234,000.
On
May 21, 2019, the Company entered into a convertible promissory note with an investor of the Company in the amount of $262,500.
The note bears 10% interest and is payable in full on May 21, 2020. The Company has recorded a beneficial conversion feature of
approximately $258,000, which is recorded as a discount on the note payable and being amortized over the life of the note. As
of June 3, 2019, the balance of the beneficial conversion feature is approximately $234,000.
Preferred
Dividend Payable
Preferred
dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of June
30, 2019 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $45,000.
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. Addionally, TR Capital has not declared dividends
due the Company’s financial condition.
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 June 30, 2019, no accrued interest or penalties are included on the related tax liability
line in the balance sheet.
Net
(Loss) per Share
Basic
net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the
period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed
by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during
the period.
The
dilutive effect of the outstanding 3,058,500 options, and 17,537,896 warrants at December 31, 2018, 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 be anti-dilutive.
Recently
Issued Accounting Pronouncements
In March 2019
- the Financial Accounting Standards Board (“FASB”) Update 2019-01—
Leases (Topic 842): Codification Improvements.
The
transition and effective date provisions for this Update apply to Issue 1 and Issue 2 in the Update. They do not apply to
Issue 3 in the Update because the amendments for that Issue are to the original transition requirements in Topic 842. The
amendments in this Update amend Topic 842. That Topic has different effective dates for public business entities and entities
other than public business entities. The effective date of those amendments is for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years for any of the following:
1)
A public business entity
2)
A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an
exchange or an over-the-counter market
3)
An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).
For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and
interim periods within fiscal years beginning after December 15, 2020. Early application is permitted. An entity should apply
the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph
842-10-65-1(c). Management has determined to not adopt this application early. Further, it will have a minimal impact on the Company’s
financial statements.
In
August 2018, 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.
In
February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840,
Leases
. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees
of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under
the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing,
and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification
affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease guidance
effective January 1, 2019. The Company only has one lease in effect; its office lease located in Aurora Colorado. The lease rate
is less than $3,000/month and expires on March 31, 2020. The Company is more likely than not to renew this lease and is not obligated
to renew the lease. The office lease is insignificant to the financial presentation of the Company, therefore, it is not shown
on the Company’s financial statements. The Company has adopted the modified retrospective approach therefore the Company
has no plans of restating prior periods and that there is no asset or liability currently.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
NOTE
3 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon
purchasing land, the value is recorded at the purchase price or fair value, whichever is more appropriate. Costs incurred to prepare
the land for the intended purpose are also capitalized in the recorded cost of the land. No amortization or depreciation is taken
on land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for
any potential impairments.
Water
Rights and Infrastructure
The
Company has acquired both direct flow water rights and water storage rights. It has obtained water rights through the purchase
of shares in a mutual ditch company, which it accomplished through its purchase of shares in HCIC, or through the purchase of
an entity holding water rights, which it effected through its purchase of a membership interest of Orlando. The Company may also
acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court
and administered under the jurisdiction of the Office of the State Engineer.
Upon
purchasing water rights, the value is recorded at our purchase price. If a majority interest is acquired in a company holding
water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines
the fair value of the assets. To assist with the valuation, the Company may consider reports from a third-party valuation firm.
If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized. If the value
of the water assets are less than what the Company paid then goodwill is recognized.
Subsequent
to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair
market value, the Company will establish an impairment allowance. Currently, there are no impairments on the Company’s land
and water shares. No amortization or depreciation is taken on the water rights.
Gain
on Disposal of Assets
During
the three and six months ended June 30, 2019 and June 30, 2018, we sold sub-divided, unimproved lots of land located in El Paso
County Colorado and recognized a gain of approximately $68,000 and $80,000, respectively. For the six months ended June 30, 2019,
we recognized approximately $85,000 gain from sale and disposal of equipment.
NOTE
4 – NOTES PAYABLE
Below
is a summary of the Company’s consolidated long term debt:
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC seller
carry back
|
|
$
|
6,323,000
|
|
|
$
|
927,000
|
|
|
$
|
-
|
|
|
$
|
6,323,000
|
|
|
|
6
|
%
|
|
Shares in
the Mutual Ditch Company
|
CWCB
|
|
|
622,000
|
|
|
|
7,000
|
|
|
|
-
|
|
|
|
690,000
|
|
|
|
2.5
|
%
|
|
Certain Orlando and
Farmland assets
|
McFinney Agri-Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
6.8
|
%
|
|
2,400 acres of pasture
land in Ellicott Colorado
|
GrowCo note
|
|
|
390,000
|
|
|
|
23,000
|
|
|
|
-
|
|
|
|
390,000
|
|
|
|
6
|
%
|
|
None
|
Bridge loan Harding
|
|
|
7,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
18
|
%
|
|
Potential conversion
into Ellicott Land security
|
Auctus Bridge Loan
|
|
|
262,500
|
|
|
|
3,000
|
|
|
|
234,000
|
|
|
|
203,000
|
|
|
|
12
|
%
|
|
Third lien on Ellicott
land
|
Morningview
Bridge Loan
|
|
|
262,500
|
|
|
|
3,000
|
|
|
|
234,000
|
|
|
|
75,000
|
|
|
|
18.0
|
%
|
|
Unsecured
|
El Paso Land notes
|
|
|
271,000
|
|
|
|
63,000
|
|
|
|
-
|
|
|
|
271,000
|
|
|
|
12.0
|
%
|
|
Second lien on Ellicott
land
|
WRC convertible notes
|
|
|
500,000
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
12.0
|
%
|
|
Lien on water supply
agreement
|
Butte
Valley Land notes
|
|
|
192,000
|
|
|
|
83,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
18
|
%
|
|
Butte Valley Land
|
Equipment loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,000
|
|
|
|
5
- 8
|
%
|
|
Equipment
|
Investors
Fiduciary LLC
|
|
|
711,000
|
|
|
|
95,000
|
|
|
|
-
|
|
|
|
551,000
|
|
|
|
-
|
|
|
Shares of HCIC
|
Total
|
|
|
9,541,000
|
|
|
$
|
1,295,000
|
|
|
$
|
468,000
|
|
|
|
9,335,000
|
|
|
|
|
|
|
|
Less: note discounts
|
|
|
(468,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(63,000
|
)
|
|
|
|
|
|
|
Less:
Current portion net of discount
|
|
|
(8,005,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,099,000
|
)
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
1,068,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,173,000
|
|
|
|
|
|
|
|
NOTE
5 –
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 prior farming operations
were discontinued; however, 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):
|
|
Six
Months Ended June 30, 2019
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-house
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-house
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
37
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
17
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
37
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
17
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
(409
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(460
|
)
|
|
|
(869
|
)
|
|
|
(698
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(526
|
)
|
|
|
(1,224
|
)
|
Total
Other Income (Expense)
|
|
|
(232
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
(482
|
)
|
|
|
12,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(300
|
)
|
|
|
11,714
|
|
Net (Loss) from Operations
Before Income Taxes
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(702
|
)
|
|
|
(1,314
|
)
|
|
|
11,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(814
|
)
|
|
|
10,507
|
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (Loss) from Operations
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(702
|
)
|
|
|
(1,314
|
)
|
|
|
11,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(814
|
)
|
|
|
10,507
|
|
Net (Loss) from Discontinued
Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(810
|
)
|
Preferred dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(985
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(996
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss)
|
|
$
|
(612
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(714
|
)
|
|
$
|
(1,326
|
)
|
|
$
|
10,336
|
|
|
$
|
-
|
|
|
$
|
(810
|
)
|
|
$
|
(825
|
)
|
|
$
|
8,701
|
|
Segment
Assets
|
|
$
|
10,534
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,153
|
|
|
$
|
30,687
|
|
|
$
|
10,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,152
|
|
|
$
|
30,902
|
|
NOTE
6 – EQUITY TRANSACTIONS
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 June
30, 2019, was 51,151,408 common shares.
During
the six months ended June 30, 2019, Two Rivers issued the following common stock:
|
●
|
1,179,817
shares issued to Morningview as a $75,000 principal paydown plus interest, which represents the debt being fully paid at June
30, 2019 and which did not produce a loss because the conversion was made under the terms of the convertible debt agreement;
|
|
●
|
3,040,350
shares issued to Powderhorn/Silverback as a $127,665 principal paydown plus interest, which represents the debt being fully
paid at June 30, 2019 and which did not produce a loss because the conversion was made under the terms of the convertible
debt agreement;
|
|
●
|
555,560
shares issued to an investor relations firm. The shares issued were valued at $0.1283/share with a corresponding expense of
approximately $71,000;
|
|
●
|
545,455
shares issued to Silverback for a cashless exercise of warrants; and
|
|
●
|
255,231
to Black Mountain for a cashless exercise of warrants.
|
During
the six months ended June 30, 2018, Two Rivers issued 374,250 common stock to Black Mountain for a $100,000 principle reduction
in its Note Payable.
During
the six months ended June 30, 2019, Two Rivers recognized $269,000 in stock based compensation to its employees and directors.
During
the six months ended June 30, 2018, Two Rivers recognized $373,000 in stock based compensation to its employees and directors.
NOTE
7 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has a net loss of $1,326,000 during the six months ended June 30, 2019. Actual cash consumed
from our operations during the six months ended June 30, 2019 was $481,000. At June 30, 2019, the Company had a working
capital deficit of $20,198,000 and an accumulated deficit of approximately $95,780,000, respectively. The HCIC seller carry back
debt 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
June 30, 2019 to August 13, 2019 the Company has collected $50,000 from entities related to Gerald Anderton, Sr. Chairman of the
Board of Two Rivers Water & Farming Company as of July 30, 2019.
We
are in the process of working with the Vaxa Entities and its funders to continue to fund Two Rivers operations. There is no assurances
that this additional funding will occur.
Additionally,
we continue to reduce our general and administrative expenses and cash required for our operations.
Management
Plans
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 these 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
8 - 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 terminated 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
|
|
July
1 – December 31, 2019
|
|
$
|
16,000
|
|
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.
NOTE
9 – RELATED PARTY
During
the six months ended June 30, 2019 Mr. Harding loaned the Company $2,500 in January 2019. Additionally, the Company
made repayments of approximately $11,000 for loans provided to the Company during the six months ended June 30, 2019.
NOTE
10 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
June
30, 2019
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
During
the year ended December 31, 2018 a court date has been set for a hearing of the State of Colorado’s legal action to
compel the Company to demolish Cucharas #5 reservoir. A contingent liability, with an offsetting expense of $1,800,000 has
been recognized. In July, 2019, the Company reached a settlement with the State of Colorado, whereby the Company will pay
approximately $922,000 plus interest to the State of Colorado in exchange for a full settlement of the above legal action.
The Company anticipates recognizing a reduction of this contingent liability from $1,800,000 to approximately $922,000, along
with additional non-cash gains of approximately $50,000 from the negotiations and resolution of previously recorded accounts
payable, on Two Rivers’ financial reports dated September 30, 2019.
|
|
|
|
|
●
|
Additional
Two Rivers common shares were issued as follows:
|
|
○
|
14,840
issued for a conversion from TR Capital; and
|
|
|
|
|
○
|
523,395
issued to Black Mountain for a warrant exercise.
|
|
●
|
Appointment
and Election of Board Member
|
At
a Two Rivers Water & Farming Company Board meeting on July 29, 2019, Mr. Gerald Anderton Sr. was appointed by unanimous consent
to the Company’s board to serve until the next annual meeting of shareholders and Mr. Anderton accepted the appointment.
On
July 30, 2019, Mr. Anderton was elected as Chairman of the Board of Two Rivers Water & Farming Company by unanimous consent.
For
further information, refer to the Form 8-K filed by the Company on July 31, 2019
|
●
|
Acquisition
of Vaxa Global, LLC and subsidiaries
|
On
July 31, 2019, we completed our previously announced acquisition of Vaxa Global, LLC, or Vaxa, from Easby Land & Cattle Company,
LLC, or Easby, pursuant to a share exchange agreement dated February 21, 2019, which we refer to as the Purchase Agreement. Under
the terms of the Purchase Agreement, we acquired the 100% membership interest in Vaxa 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.
At
the closing on July 31, 2019, we issued to Easby a total of 30,000,000 shares of common stock. In addition, we may be required
to issue additional shares of common stock 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 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa for
the twelve months 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 August 2020.
Vaxa
owns a 100% membership interest in each of Ekstrak Labs LLC, or Ekstrak, and Gramz Holdings, LLC, or Gramz. Vaxa grows hemp plants
for cannabidiol, or CBD, extraction. Ekstrak extracts CBD hemp. 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 have
been developed to capitalize on the medicinal and therapeutic benefits of hemp.
We
intend to expand Vaxa’s operations to grow hemp on land that we own, using water that we supply. This will, in turn, provide
additional hemp products to Ekstrak and Gramz™.
For
further information, refer to the Form 8-K filed by the Company on August 1, 2019
●
|
Bridge
Note from Gerald Anderton
|
On
August 6, 2019, we received $50,000 from Gerald Anderton as a bridge note. Mr. Anderton currently serves on Two Rivers’
Board and as Chairman of the Board.