ITEM
1. FINANCIAL STATEMENTS
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
(In
thousands, except for number of shares)
(Unaudited)
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
(Unaudited)
|
|
|
(Derived from Audit)
|
|
ASSETS:
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
401
|
|
|
$
|
6
|
|
Accounts receivable, related party
|
|
|
17
|
|
|
|
0
|
|
Deposits and other current assets
|
|
|
63
|
|
|
|
58
|
|
Total Current Assets
|
|
|
481
|
|
|
|
64
|
|
Long Term Assets
|
|
|
|
|
|
|
|
|
Property, equipment and software, net
|
|
|
5
|
|
|
|
20
|
|
Land
|
|
|
3,252
|
|
|
|
3,299
|
|
Water assets
|
|
|
24,891
|
|
|
|
24,891
|
|
Supply rights
|
|
|
480
|
|
|
|
-
|
|
Investment in GCP1
|
|
|
2,192
|
|
|
|
2,289
|
|
Goodwill
|
|
|
14,100
|
|
|
|
-
|
|
Other long term assets
|
|
|
98
|
|
|
|
96
|
|
Total Long Term Assets
|
|
|
45,018
|
|
|
|
30,595
|
|
TOTAL ASSETS:
|
|
$
|
45,499
|
|
|
$
|
30,695
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,305
|
|
|
$
|
1,243
|
|
Accrued liabilities
|
|
|
5,963
|
|
|
|
5,780
|
|
Current portion of notes payable, net of discount
|
|
|
9,329
|
|
|
|
8,099
|
|
Preferred dividend payable
|
|
|
4,988
|
|
|
|
4,970
|
|
Total Current Liabilities
|
|
|
21,585
|
|
|
|
20,092
|
|
Notes payable, net of current portion
|
|
|
868
|
|
|
|
1,173
|
|
Total Liabilities
|
|
|
22,453
|
|
|
|
21,265
|
|
Commitments & Contingencies (Notes 4,7,9,10)
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 200,000,000 shares authorized, 83,195,939 shares issued and outstanding at September 30, 2019 and 45,574,458 shares issued and outstanding at December 31, 2018
|
|
|
84
|
|
|
|
46
|
|
Preferred shares, $0.001 par value, 5,000,000 shares authorized, 64,935 shares issued and outstanding at September 30, 2019 and December 31, 2018.
|
|
|
252
|
|
|
|
252
|
|
Additional paid-in capital
|
|
|
95,942
|
|
|
|
81,186
|
|
Accumulated (deficit)
|
|
|
(95,596
|
)
|
|
|
(94,454
|
)
|
Total Two Rivers Water & Farming Company Stockholders’ Equity
|
|
|
682
|
|
|
|
(12,970
|
)
|
Noncontrolling interest in subsidiaries
|
|
|
22,364
|
|
|
|
22,364
|
|
Total Stockholders’ Equity
|
|
|
23,046
|
|
|
|
9,394
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
45,499
|
|
|
$
|
30,659
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(In
thousands, except for number of shares)
(Unaudited)
|
|
Three Months Ended
September 30
|
|
|
Nine Months Ended
September 30
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
-
|
|
Distribution Rights
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
Land leasing
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
Other
|
|
|
5
|
|
|
|
5
|
|
|
|
8
|
|
|
|
-
|
|
Total Revenue
|
|
|
108
|
|
|
|
5
|
|
|
|
145
|
|
|
|
22
|
|
Direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
108
|
|
|
|
5
|
|
|
|
145
|
|
|
|
22
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
312
|
|
|
|
661
|
|
|
|
1,149
|
|
|
|
1,838
|
|
Dam demolition expense
|
|
|
(825
|
)
|
|
|
1,800
|
|
|
|
(825
|
)
|
|
|
1,800
|
|
Depreciation and amortization
|
|
|
16
|
|
|
|
17
|
|
|
|
48
|
|
|
|
75
|
|
Total operating expenses
|
|
|
(497
|
)
|
|
|
2,478
|
|
|
|
372
|
|
|
|
3,713
|
|
Profit (Loss) from Operations
|
|
|
605
|
|
|
|
(2,473
|
)
|
|
|
(227
|
)
|
|
|
(3,691
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(390
|
)
|
|
|
(217
|
)
|
|
|
(918
|
)
|
|
|
(736
|
)
|
Gain (loss) on disposal of assets and intangibles
|
|
|
-
|
|
|
|
37
|
|
|
|
85
|
|
|
|
114
|
|
Loss on debt settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
Other income
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
15
|
|
Gain on de-consolidation of GrowCo
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,773
|
|
Loss on investment in GrowCo Partners 1, LLC
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
(98
|
)
|
|
|
(617
|
)
|
Total other income (expense)
|
|
|
(415
|
)
|
|
|
(176
|
)
|
|
|
(897
|
)
|
|
|
11,549
|
|
Net Profit (Loss) from Continuing Operations Before Taxes
|
|
|
190
|
|
|
|
(2,649
|
)
|
|
|
(1,124
|
)
|
|
|
7,858
|
|
Income tax (provision) benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Profit (Loss) from Continuing Operations After Taxes
|
|
|
190
|
|
|
|
(2,649
|
)
|
|
|
(1,124
|
)
|
|
|
7,858
|
|
Net (Loss) from Deconsolidation and Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
Net Profit (Loss) before Preferred Dividends and Non-Controlling Interest
|
|
|
190
|
|
|
|
(2,649
|
)
|
|
|
(1,124
|
)
|
|
|
7,048
|
|
Preferred distributions
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(18
|
)
|
|
|
(1,002
|
)
|
Net loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Profit (Loss) Attributable to Common Shareholders
|
|
|
184
|
|
|
|
(2,655
|
)
|
|
|
(1,142
|
)
|
|
|
6,046
|
|
Profit (Loss) Per Common Share - Basic:
|
|
|
0.00
|
|
|
|
(0.08
|
)
|
|
|
(0.02
|
)
|
|
|
0.18
|
|
Profit (Loss) Per Common Share – Basic and Dilutive:
|
|
|
0.00
|
|
|
|
(0.08
|
)
|
|
|
(0.02
|
)
|
|
|
0.16
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
71,006
|
|
|
|
34,256
|
|
|
|
57,057
|
|
|
|
33,529
|
|
Dilutive
|
|
|
85,867
|
|
|
|
34,256
|
|
|
|
57,057
|
|
|
|
37,149
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(In
thousands)
(Unaudited)
|
|
2019
|
|
|
2018
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss, before NCI
|
|
$
|
(1,142
|
)
|
|
$
|
6,046
|
|
Net loss from discontinued operations
|
|
|
-
|
|
|
|
810
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
48
|
|
|
|
75
|
|
Accretion of debt discount
|
|
|
313
|
|
|
|
178
|
|
Loss (Gain) from debt extinguishment
|
|
|
(33
|
)
|
|
|
-
|
|
Loss of modification of convertible debt
|
|
|
(8
|
)
|
|
|
-
|
|
Stock issued for services
|
|
|
144
|
|
|
|
-
|
|
Stock option and warrant exercise
|
|
|
290
|
|
|
|
1,220
|
|
Gain on deconsolidation
|
|
|
-
|
|
|
|
(12,773
|
)
|
Loss of investment in GrowCo
|
|
|
98
|
|
|
|
617
|
|
Loss (Gain) from disposal of fixed assets
|
|
|
(85
|
)
|
|
|
(114
|
)
|
Net change in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable, related party
|
|
|
(4
|
)
|
|
|
2
|
|
Decrease in deposits, prepaid expenses and other assets
|
|
|
(2
|
)
|
|
|
(47
|
)
|
Increase (decrease) in accounts payable
|
|
|
77
|
|
|
|
93
|
|
Increase in distribution payable to preferred shareholders
|
|
|
18
|
|
|
|
1,002
|
|
Increase in accrued liabilities and other
|
|
|
(503
|
)
|
|
|
2,067
|
|
Net Cash Used in Operating Activities
|
|
|
(789
|
)
|
|
|
(824
|
)
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(33
|
)
|
|
|
-
|
|
Sale of property and equipment
|
|
|
47
|
|
|
|
72
|
|
Investment in water assets
|
|
|
-
|
|
|
|
(102
|
)
|
Acquisition
|
|
|
9
|
|
|
|
-
|
|
Net Cash Used in Investing Activities
|
|
|
23
|
|
|
|
(30
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings on debt – related party
|
|
|
20
|
|
|
|
-
|
|
Proceeds from debt
|
|
|
1,235
|
|
|
|
1,426
|
|
Payment on notes payable
|
|
|
(94
|
)
|
|
|
(532
|
)
|
Net Cash Provided by Financing Activities
|
|
|
1,161
|
|
|
|
894
|
|
Net Increase in Cash & Cash Equivalents
|
|
|
395
|
|
|
|
40
|
|
Beginning Cash & Cash Equivalents
|
|
|
6
|
|
|
|
14
|
|
Ending Cash & Cash Equivalents
|
|
|
401
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
196
|
|
Shares issued in exchange for debt
|
|
$
|
357
|
|
|
$
|
-
|
|
Conversion of debt, preferred shares into Two Rivers common stock
|
|
$
|
287
|
|
|
$
|
100
|
|
Land exchanged for debt
|
|
$
|
58
|
|
|
$
|
-
|
|
Equipment exchanged for debt
|
|
$
|
14
|
|
|
$
|
-
|
|
Debt discount from beneficial conversion feature
|
|
$
|
516
|
|
|
$
|
-
|
|
Cashless exercise of warrants
|
|
$
|
1
|
|
|
$
|
1
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements
TWO
RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
(In
thousands)
(Unaudited)
|
|
Voting
Common Stock
|
|
|
Water Redev. 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,046
|
|
|
|
-
|
|
|
|
6,046
|
|
Prior period adjustment preferred shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(100
|
)
|
Stock issued in exchange for debt settlement
|
|
|
874
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
Shares issued for TR Capital conversions
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,190
|
|
Shares issued for services
|
|
|
1,091
|
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
RSU issuance
|
|
|
118
|
|
|
|
0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrant issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(383
|
)
|
|
|
(383
|
)
|
GrowCo deconsolidation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,858
|
)
|
|
|
(8,858
|
)
|
Balances, September 30, 2018
|
|
|
34,848
|
|
|
$
|
36
|
|
|
|
65
|
|
|
$
|
252
|
|
|
$
|
78,484
|
|
|
$
|
(91,122
|
)
|
|
$
|
22,511
|
|
|
$
|
10,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances December 31, 2018
|
|
|
45,575
|
|
|
$
|
46
|
|
|
|
65
|
|
|
$
|
252
|
|
|
$
|
81,186
|
|
|
$
|
(94,454
|
)
|
|
$
|
22,364
|
|
|
$
|
9,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income attributed to Two Rivers common shareholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,142
|
)
|
|
|
-
|
|
|
|
(1,142
|
)
|
Stock issued in exchange for debt settlement
|
|
|
4,220
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
287
|
|
Beneficial conversion feature on convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
516
|
|
|
|
-
|
|
|
|
-
|
|
|
|
516
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
230
|
|
Shares issued for services
|
|
|
755
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
Warrant exercise
|
|
|
1,324
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrant issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
Refundable shares issued for debt
|
|
|
1,322
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
356
|
|
|
|
-
|
|
|
|
-
|
|
|
|
357
|
|
Shares issued for acquisition
|
|
|
30,000
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,170
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,200
|
|
Balances September 30, 2019
|
|
|
83,196
|
|
|
$
|
84
|
|
|
|
65
|
|
|
$
|
252
|
|
|
$
|
95,942
|
|
|
$
|
(95,596
|
)
|
|
$
|
22,364
|
|
|
$
|
23,046
|
|
The
accompanying notes to consolidated financial statements are an integral part of these statements
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 owns
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,
2019, we own approximately 7,076 gross acres. Gross acres owned showed a net increase of 811 acres from 6,265 gross acres at December
31, 2018 due the addition of acreage owned by Huerfano Cucharas Irrigation Company that was previously not reported.
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. We plan to 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 plan 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 would 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 was 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 raising additional capital to invest 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 primary area of focus is in the Huerfano-Cucharas river basin in southeastern Colorado.
Although no final decision has been reached, we are considering various alternatives and proposals for financing and restructuring
Water Redev including a spin-off to shareholders, direct funding and partial or full rights sales.
Vaxa
Entities
On
July 31, 2019, Two Rivers completed its acquisition of a 100% interest in Vaxa Global, LLC and its two wholly-owned 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. 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.
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™.
In
September 2019, Vaxa entered into an agreement to purchase over $700,000 in extraction and processing equipment, and all seeds,
clone and biological assets, as well as the 2019 hemp crop from Butte Valley farm, from Montverde Partners, LLC (“Montverde”),
in exchange for 3,000,000 shares of our common stock which were contributed by Easby Land & Cattle, LLC. Monteverde is a joint
venture partner of Vaxa in the Butte Valley hemp farming operation near Walsenburg, Colorado. The transaction closed in October
2019.
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. Prior to 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 nine months ended September 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 2018 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).
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
|
|
September 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
|
|
September 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
|
|
|
|
|
(226,000
|
)
|
|
|
(227,000
|
)
|
Net book value
|
|
|
|
$
|
5,000
|
|
|
$
|
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
nine months ended September 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. In the three months ended September
30, 2019, there were no 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.
In
conjunction with the acquisition of Vaxa, the Company recognized goodwill of approximately $14,100,000 based on the issuance of
30,000,000 shares at the closing share price ($0.44) on the date of acquisition (July 31, 2019) plus net liabilities acquired
(See NOTE 8).
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 nine months ended September 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, land, licensing agreements and farming contracts 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 nine months ended
September 30, 2019 and 2018.
Farming
For
the three and nine months ended September 30, 2019 the Company had approximately $0 in net crop share revenues. For the three
and nine months ended September 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
Vaxa
generates revenue from hemp farming operations, distribution agreements and CBD consumer product sales. For the nine months ended
September 30, 2019, Vaxa generated approximately $103,000 in revenue. Prior to the acquisition, Vaxa entered into a farm lease
with the Company to run a pilot hemp farming operation in Butte Valley on property that the Company owned.
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 $1,000,000
plus interest to the State of Colorado in exchange for a full settlement of the above legal action. The Company recognized a reduction
of this contingent liability from $1,800,000 to approximately $1,000,000, along with additional non-cash gains of approximately
$25,000 from the negotiations and resolution of previously recorded accounts payable, on Two Rivers’ in these financial
statements. In the three months ending September 30, 2019, the Company made payments of approximately $82,000 to the State of
Colorado in compliance with the payment terms of the settlement agreement. The balance of the accrued expense for the settlement
was approximately $893,000 on 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 September 30,
2019 the balance of the beneficial conversion feature is approximately $168,000.
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 September 30, 2019, the balance of the beneficial conversion feature is approximately $168,000.
On
September 19, 2019 the Company entered into a convertible promissory note with an investor of the Company in the amount of $575,000.
The note bears 12% interest and is payable in full on March 19, 2020. The note is convertible after 180 days so no beneficial
conversion feature was recognized. The Company recognized a total original issue discount amount of approximately $413,000 on
the note consisting of a fixed amount of $58,000 and $356,000 for shares issued. Approximately 83% of the shares issued by the
Company ($297,000 of the note discount) are returnable to the Company if the note is repaid on or before the maturity date.
Preferred
Dividend Payable
Preferred
dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of September
30, 2019 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $51,000.
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. Additionally, 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 September 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. As of September 30, 2019,
the total number of warrants outstanding were 5,948,730, including 4,225,778 issued to Black Mountain which have an exercise price
of $0.07878/share.
The
common shares used in the computation of basic and diluted net income (loss) per share are reconciled as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average number of shares outstanding – basic
|
|
|
71,006,000
|
|
|
|
57,057,000
|
|
Dilutive effect of convertible debt
|
|
|
8,912,000
|
|
|
|
-
|
|
Dilutive effect of warrant exercise
|
|
|
5,949,000
|
|
|
|
-
|
|
Weighted average number of shares outstanding – diluted
|
|
|
85,867,000
|
|
|
|
57,057,000
|
|
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 nine months ended September 30, 2019 and 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 nine months ended September 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:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Note
|
|
Principal Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC seller carry back
|
|
$
|
6,323,000
|
|
|
$
|
1,050,000
|
|
|
$
|
-
|
|
|
$
|
6,323,000
|
|
|
|
6
|
%
|
|
Shares in the Mutual Ditch Company
|
CWCB
|
|
|
622,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
690,000
|
|
|
|
2.5
|
%
|
|
Certain Orlando and Farmland assets
|
GrowCo note
|
|
|
390,000
|
|
|
|
29,000
|
|
|
|
-
|
|
|
|
390,000
|
|
|
|
6
|
%
|
|
None
|
Bridge loan Harding
|
|
|
7,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
12
|
%
|
|
Added to lien on
Ellicott land
|
El Paso Land notes
|
|
|
271,000
|
|
|
|
76,000
|
|
|
|
-
|
|
|
|
271,000
|
|
|
|
12
|
%
|
|
Second lien on
Ellicott land
|
Easby Credit Line (Vaxa), related party
|
|
|
486,000
|
|
|
|
8,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Unsecured
|
Promissory Note (Vaxa)
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Biomass material
|
Investors Fiduciary, related party
|
|
|
786,000
|
|
|
|
133,000
|
|
|
|
-
|
|
|
|
551,000
|
|
|
|
20
|
%
|
|
Shares of HCIC
|
Auctus Convertible Note
|
|
|
262,500
|
|
|
|
9,000
|
|
|
|
168,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
Unsecured
|
Morningview Convertible Note
|
|
|
262,500
|
|
|
|
9,000
|
|
|
|
168,000
|
|
|
|
-
|
|
|
|
10
|
%
|
|
Unsecured
|
Labry’s Convertible Note
|
|
|
575,000
|
|
|
|
2,000
|
|
|
|
388,000
|
|
|
|
-
|
|
|
|
12
|
%
|
|
Unsecured
|
WRC convertible notes
|
|
|
300,000
|
|
|
|
101,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
12
|
%
|
|
Lien on water supply agreement
|
Butte Valley Land notes
|
|
|
400,000
|
|
|
|
101,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
18
|
%
|
|
Butte Valley Land
|
McFinney Agri-Finance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
6.8
|
%
|
|
2,400 acres of land in Ellicott Colorado
|
Powderhorn/Silverback note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203,000
|
|
|
|
12
|
%
|
|
Third lien on
Ellicott land
|
Equipment loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,000
|
|
|
|
5-8
|
%
|
|
Equipment
|
Morningview Financial note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
18
|
%
|
|
Unsecured
|
Total
|
|
|
10,935,000
|
|
|
$
|
1,530,000
|
|
|
$
|
(724,000
|
)
|
|
|
9,335,000
|
|
|
|
|
|
|
|
Less: note discounts
|
|
|
(724,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(63,000
|
)
|
|
|
|
|
|
|
Less: Current portion net of discount
|
|
|
(9,343,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,045,000
|
)
|
|
|
|
|
|
|
Long term portion
|
|
$
|
868,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,227,000
|
|
|
|
|
|
|
|
NOTE
5 – SHORT-TERM CONVERTIBLE NOTE PAYABLE
On
September 24, 2019, we entered into an agreement (“Agreement”) with an accredited investor (“Note Holder”)
to provide a net of $457,500 in short term working capital. Two Rivers intends to use these funds for the payment of certain debts,
payments on accounts and working capital.
The
face value of the convertible debt is $575,000 with a purchase price of $517,500, a 6-month term and an interest rate of 10% per
annum. The debt is convertible at a per common stock price at the lower of 70% multiplied by the 10-day trailing market price
of Two Rivers’ common shares (representing a discount rate of 30%) or $0.30/share. The Convertible note is subject to other
terms and conditions.
Two
Rivers issued 1,101,532 shares of its common stock (the “Returnable Shares”) to the Note Holder, as well as an additional
220,306 shares of Common Stock (the “Commitment Shares”), subject to the terms and conditions of the Agreement and
the Note, pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933. If Two Rivers
pays the convertible debt prior to 180 days from the date of the convertible note, the Returnable Shares shall be returned by
the Note Holder to Two Rivers. If Two Rivers fails to pay the convertible note by that date, the Note Holder may retain the Returnable
Shares.
In
August 2019, Investors Fiduciary, LLC loaned $75,000 to the Company under the existing credit line to bring the balance to approximately
$786,000 as of September 30, 2019. The credit line contains a conversion feature at a rate of $0.14 per share. Investors Fiduciary
is controlled by Greg Harrington, CEO of the Company and Gerald Anderton, Sr., Chairman of the Board of the Company is an investor.
On
May 24, 2019, we entered into separate securities purchase agreements with two investors pursuant to which we received $480,000
in cash, which we intend to use for the payment of outstanding indebtedness and accounts payable and for working capital. Pursuant
to the securities purchase agreements, we issued convertible promissory notes, having a total principal amount of $525,000. Each
of the notes has a one-year term and bears interest at the rate of 10% per annum. We sold the notes for an aggregate purchase
price of $525,000, less $45,000 for payment for legal fees and original issue discount. Each of the notes is convertible into
common stock at a price equal to 60% of the trailing market price of common stock (representing a discount of 40%). The minimum
conversion price for each note is $0.20 per share unless and until such time, if any, as we do not make a principal and interest
payment when due with respect to the note.
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 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):
|
|
Nine Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Parent
|
|
|
Vaxa
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
34
|
|
|
$
|
103
|
|
|
$
|
8
|
|
|
$
|
145
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
22
|
|
Less: Direct Cost of Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
34
|
|
|
|
103
|
|
|
|
8
|
|
|
|
145
|
|
|
|
10
|
|
|
|
-
|
|
|
|
12
|
|
|
|
22
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
(611
|
)
|
|
|
(14
|
)
|
|
|
253
|
|
|
|
(372
|
)
|
|
|
(886
|
)
|
|
|
-
|
|
|
|
(997
|
)
|
|
|
(1,883
|
)
|
Total Other Income (Expense)
|
|
|
(484
|
)
|
|
|
7
|
|
|
|
(420
|
)
|
|
|
(897
|
)
|
|
|
11,928
|
|
|
|
-
|
|
|
|
(2,209
|
)
|
|
|
9,719
|
|
Net Income (Loss) from Operations Before Income Taxes
|
|
|
(1,061
|
)
|
|
|
96
|
|
|
|
(159
|
)
|
|
|
(1,124
|
)
|
|
|
11,052
|
|
|
|
-
|
|
|
|
(3,194
|
)
|
|
|
7,858
|
|
Income Taxes (Expense) Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Income (Loss) from Operations
|
|
|
(1,061
|
)
|
|
|
96
|
|
|
|
(159
|
)
|
|
|
(1,124
|
)
|
|
|
11,052
|
|
|
|
-
|
|
|
|
(3,194
|
)
|
|
|
7,858
|
|
Net Income (Loss) from Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(810
|
)
|
Preferred dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
(986
|
)
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
(1,002
|
)
|
Non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Income (Loss)
|
|
$
|
(1,061
|
)
|
|
$
|
96
|
|
|
$
|
(177
|
)
|
|
$
|
(1,142
|
)
|
|
$
|
10,066
|
|
|
$
|
-
|
|
|
$
|
(3,210
|
)
|
|
$
|
6,046
|
|
Segmented Assets
|
|
$
|
24,856
|
|
|
$
|
24,856
|
|
|
$
|
20,131
|
|
|
$
|
45,500
|
|
|
$
|
10,746
|
|
|
$
|
-
|
|
|
$
|
20,175
|
|
|
$
|
30,921
|
|
NOTE
7 – 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 September
30, 2019, was 83,195,969 common shares.
During
the nine months ended September 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;
|
|
●
|
255,231
shares issued to Black Mountain for a cashless exercise of warrants;
|
|
●
|
14,840
shares issued for a conversion from TR Capital;
|
|
●
|
523,395
shares issued to Black Mountain for a cashless exercise of warrants;
|
|
●
|
30,000,000
shares issued to Easby Land & Cattle Company, LLC. The shares were valued at $0.44/share or approximately $13,200,000;
|
|
●
|
185,000
shares issued to a chief financial officer firm. The shares issued were valued at $0.27/share with a corresponding expense
of approximately $50,000;
|
|
●
|
139,985
shares issued for a conversion from TR Capital; and
|
|
●
|
1,321,838
shares issued to Labrys Fund, LP (see Note 5).
|
During
the nine months ended September 30, 2018, Two Rivers issued 374,250 common stock to Black Mountain for a $100,000 principal reduction
in its Note Payable.
During
the nine months ended September 30, 2019, Two Rivers recognized $289,000 in stock based compensation to its employees and directors.
During
the nine months ended September 30, 2018, Two Rivers recognized $373,000 in stock based compensation to its employees and directors.
During
the nine months ended September 30, 2019, the Company recorded a total of $516,000 in beneficial conversion features related to
Convertible Promissory Notes.
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 September 30, 2019, the balance of the beneficial conversion feature is approximately $168,000.
NOTE
8 – ACQUISITION OF VAXA GLOBAL
On
July 31, 2019, the Company closed on the purchase of all the membership interests in Vaxa Global, LLC (“Vaxa”) and its two wholly-owned subsidiaries from the sole member Easby Land & Cattle, LLC (“Easby”). Greg
Harrington, the managing member of Easby became the CEO of the Company and a member of the Board of Directors in September 2019.
Vaxa is in the business of hemp farming, extraction and manufactured consumer CBD products. The closing occurred pursuant to a
Share Exchange Agreement between the Company and Easby on February 22, 2019, as amended.
Pursuant
to the Share Exchange Agreement, the Company issued a total of 30,000,000 shares of common stock to Easby at the closing for the
Vaxa membership interests. There was no cash consideration paid for the acquisition. The Purchase Price for the acquisition, $13,200,000
was calculated using the closing price Two Rivers common stock on the date of closing, $0.44/share, multiplied by 30,000,000 shares.
In
addition to the shares issued at closing, the Company 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:
|
i.)
|
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
|
|
|
|
|
ii.)
|
20,000,000.
|
It
is expected that the earn-out shares, if any, would be issued by August 2020. There was no valuation applied to the earnout on
the acquisition date due to the historical performance of Vaxa and the Company’s expectation of the likelihood of material
earnings during the window. The earnout valuation will be reviewed quarterly until its expiration in June 2020.
The
acquisition date estimated fair value of the consideration transferred totaled $13,200,000, which consisted of the following:
Cash paid
|
|
$
|
0
|
|
Common Stock Issued
|
|
|
13,200,000
|
|
Total Purchase Price
|
|
$
|
13,200,000
|
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
511,000
|
|
Net Liabilities & Retained Earnings
|
|
|
(1,411,000
|
)
|
Goodwill
|
|
|
14,100,000
|
|
Total Purchase Price
|
|
$
|
13,200,000
|
|
The
primary asset of Vaxa at the time of acquisition was an exclusive distribution agreement with a Canadian grower and supplier of
cannabidiol-rich hemp biomass. The agreement was from its inception in December 2017 runs for a five-year term. The agreement
calls for fixed payments of $700,000 for the exclusive supply rights at competitive fixed prices. Vaxa had recognized the value
of the agreement as intangible asset and is amortizing the value over the 5 year period. The balance, net of amortization, on
the time of acquisition was approximately $480,000.
During
the preliminary purchase price allocation period, which may be up to one year from the business combination date, the Company
may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary
purchase price allocation period, the Company may record adjustments to assets acquired or liabilities assumed subsequent to the
purchase price allocation period in its operating results in the period in which the adjustments were determined.
Pro
forma results
The
following table sets forth the audited pro forma results of the Company as if the acquisition was effective on the first day of
each period presented. These combined results are not necessarily indicative of the results that may have been achieved had the
companies always been combined.
|
|
Six Months
|
|
|
Twelve Months
|
|
|
|
Ending
|
|
|
Ending
|
|
|
|
Jun 30, 2019
|
|
|
Dec 31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
70,000
|
|
|
$
|
66,000
|
|
Net Income (Loss)
|
|
$
|
(1,608,000
|
)
|
|
$
|
1,820,000
|
|
Basic Net Income (Loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
Diluted Net Income (Loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
Weighted average shares – basic
|
|
|
79,967
|
|
|
|
65,139
|
|
Weighted average shares – diluted
|
|
|
79,967
|
|
|
|
67,408
|
|
NOTE
9 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has a net loss of $1,142,000 during the nine months ended September 30, 2019. Cash consumed
from our operations during the nine months ended September 30, 2019 was $789,000. At September 30, 2019, the Company had a working
capital deficit of $21,104,000 and an accumulated deficit of approximately $95,596,000. 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.
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
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 terminated on June 30, 2018. On March 1, 2017, the Company entered into a sub-lease agreement with its related party McGrow
for its 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
Since
January 1, 2011, the Company has entered into a series of employment agreements with Wayne Harding in various capacities including
Chief Financial Officer initially and later 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. On September 10, 2019,
Harding resigned his positions as Chief Executive Officer and Member of the Board of Directors effective September 30, 2019. On
September 10, 2019, Harding and the Company entered into a Management Services Agreement effective October 1, 2019 with a four
month renewable term.
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. The counter claim on the lawsuit was settled in November 2019 and the Company will pursue an
insurance claim for the theft losses.
NOTE
11 – RELATED PARTY
During
the nine months ended September 30, 2019 Mr. Harding loaned the Company an additional $2,500. During the same period, the Company
made repayments of approximately $11,000 leaving an outstanding balance of approximately $7,000 at September 30, 2019.
In
August 2019, the Company received $75,000 in Bridge loans from Gerald Anderton which were added to the balance of the Credit Agreement
with Investors Fiduciary, LLC. Mr. Anderton is an investor in Investors Fiduciary and currently serves on Two Rivers’ Board
and as Chairman of the Board. Greg Harrington, Chief Executive Officer of the Company is the controlling shareholder of Investors
Fiduciary.
NOTE
12 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from September
30, 2019 through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
On
November 7, 2019, Two Rivers entered into an agreement (“Agreement”) with the Note Holder, an accredited investor,
to provide a net of $315,000 in short term working capital. Two Rivers intends to use these funds for the payment of certain
debts, payments on accounts and working capital.
|
|
|
|
|
|
The
face value of the convertible debt is $394,500 with a purchase price of $354,600, a 6-month term and an interest rate of 12%
per annum. The debt is convertible at a price equal to the lower of (1) 70% multiplied by the lowest closing bid price or
trading price (whichever is lower) of Two Rivers’ common shares during the 10 trading days immediately preceding the
conversion date (representing a discount rate of 30%) and (2) $0.30 per share. The convertible note is subject to other terms
and conditions.
|
|
|
|
|
|
Two
Rivers issued 1,083,791 shares of its common stock (the “Returnable Shares”) to the Note Holder, as well as an
additional 200,000 shares of Common Stock (the “Commitment Shares”), subject to the terms and conditions of the
Agreement and the Note, pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of
1933. If Two Rivers pays the convertible debt prior to 180 days from the date of the convertible note, the Returnable Shares
shall be returned by the Note Holder to Two Rivers. If Two Rivers fails to pay the convertible note by that date, the Note
Holder may retain the Returnable Shares.
|
|
|
|
|
●
|
On
October 18, 2019, Black Mountain completed the cashless exercise of 2,665,505 shares of Common Stock.
|
|
|
|
|
●
|
In
September 2019, Vaxa entered into an agreement to purchase over $700,000 in extraction and processing equipment, and all seeds,
clone and biological assets, as well as the 2019 hemp crop from Butte Valley farm, from Montverde Partners, LLC (“Montverde”),
in exchange for 3,000,000 shares of our common stock which were contributed by Easby Land & Cattle, LLC. Monteverde is
a joint venture partner of Vaxa in the Butte Valley hemp farming operation near Walsenburg, Colorado. The transaction closed
in October 2019.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Unless
the context requires otherwise, references in this Form 10-Q to “we,” “our,” “us” and similar
terms refer to Two Rivers Water & Farming Company and its subsidiaries.
Note
about Forward-Looking Statements
This
Form 10-Q contains forward-looking statements, such as statements relating to our financial condition, results of operations,
plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that
are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information
currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based
on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could
cause actual results to differ materially from those expressed or implied by such forward-looking statements, including the risks
described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018. By making these forward-looking
statements, we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings
we make with the Securities and Exchange Commission under the Federal securities laws. Our actual results may differ materially
from our forward-looking statements.
Overview
Our
core business is the development of our water assets.
Current
Rights Holdings
In
Colorado it is important to have both surface and storage rights, of which we have both. To date, we have acquired, managed and
used our water assets principally for use in irrigation, to increase the value and yield of our farmland.
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
|
|
|
|
10/19/1903
|
|
|
|
|
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.
The
following table presents our holdings of storage water rights:
|
|
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
restriction1
|
Cucharas
Valley Reservoir
|
|
5,705
ft
|
|
66c2
|
|
3/14/1906
|
|
|
|
34,404
|
|
Orlando
Reservoir #2
|
|
5,911
ft
|
|
349
|
|
12/14/1905
|
|
1,800
|
|
3,110
|
|
1,500
|
Purchase
of Vaxa Entities
On
July 31, 2019, we completed our acquisition of Vaxa Global, LLC (“Vaxa”) from Easby Land & Cattle Company, LLC
pursuant to a share exchange agreement dated February 21, 2019 (the “Purchase Agreement”). Under the terms of the
Purchase Agreement, we acquired 100% of the 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. 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 and Gramz Holdings, LLC.
|
●
|
Vaxa
grows hemp plants for cannabidiol, or CBD, extraction;
|
|
●
|
Ekstrak
extracts CBD hemp; and
|
|
●
|
GramzTM
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™.
1
See State of Colorado litigation.
2
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.
Results of Operations
For the Three Months Ended September 30,
2019, compared to the Three Months Ended September 30, 2018
During the three months ended September 30,
2019, we recorded revenues of approximately $108,000, compared to approximately $5,000 in the three-month period ended September
30, 2018. The increase of $103,000 was due to Vaxa acquisition.
Operating expenses during the three months
ended September 30, 2019 and 2018 were approximately $328,000 and $678,000, respectively, excluding the dam demolition expense.
The decrease of $350,000 was primarily due to the Company reducing its general and administrative expenses.
Other income and expenses for the three months
ended September 30, 2019 and 2018 were approximately $415,000 and $176,000, respectively. The net increase of $239,000 in expenses
was primarily the result of increased interest expense and a lack of gain on asset sales.
During the three months ended September 30,
2019 and 2018, we recognized a profit from continuing operations of $190,000 and a loss from continuing operations of $2,649,000,
respectively.
During the three months ended September 30,
2019 and 2018, we recognized preferred distributions of approximately $6,000 and $6,000 for the accrued dividends on the preferred
stock of Water Redevelopment.
As the result of the foregoing, the net profit
attributed to our common shareholders for the three months ended September 30, 2019 was $184,000, compared to a net loss of $2,655
for the three months ended September 30, 2018.
In December 2018, a contingent liability was
established regarding the State of Colorado’s legal action to compel the Company to demolish Cucharas #5 reservoir. In that
period, the Company recognized an expense of $1,800,000. In July 2019, the Company reached a settlement with the State of Colorado,
whereby the Company will pay approximately $1,000,000 plus interest to the State of Colorado in exchange for a full settlement
of the above legal action. In the three months ending September 30, 2019, the Company recognized a gain of $825,000 from the reduction
of this contingent liability from $1,800,000 to approximately $1,000,000, along with additional non-cash gains of approximately
$25,000 from the negotiations and resolution of previously recorded accounts payable, on Two Rivers’ in these financial statements.
For the Nine Months Ended September 30,
2019, compared to the Nine Months Ended September 30, 2018
During the nine months ended September 30,
2019, we recorded revenues of approximately $145,000, compared to approximately $22,000 in the nine-month period ended September
30, 2018. The increase of $123,000 was due to the Vaxa acquisition.
Operating expenses during the nine months ended
September 30, 2019 and 2018 were approximately $1,197,000 and $1,913,000, respectively. The decrease of $716,000 was primarily
due to the Company reducing its general and administrative expenses.
Other income and expenses for the nine months
ended September 30, 2019 and 2018 were approximately $897,000 in expenses and $11,549,000 in income, respectively. The net increase
of $12,446,000 is mostly due to the recognition of the GrowCo deconsolidation.
During the nine months ended September 30,
2019 and 2018, we recognized a loss from continuing operations of $1,124,000 and a profit from continuing operations of $7,858,000,
respectively.
During the nine months ended September 30,
2019 and 2018, we recognized preferred distributions of approximately $18,000 and $1,002,000. The reduction is due to the Company
ceasing to record an accrual for the TR Capital’s preferred distribution as of July 2018.
As the result of the foregoing, the net loss
attributed to our common shareholders, after recognizing preferred distributions and income attributed to non-controlling interest,
for the nine months ended September 30, 2019 was $1,142,000 loss, compared to a profit of $6,046,000 for the nine months ended
September 30, 2018.
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
$96 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 the Vaxa Group that would, among other things, strengthen
and expand our business operations and enable the Company to raise additional capital. This acquisition of Vaxa closed on July
31, 2019. It is anticipated that this acquisition has, and will, facilitate 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 farming and water projects. 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 effect
one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to effect
an equity or debt financing on terms acceptable to us or at all.
We historically have funded our operations
primarily from the following sources:
|
●
|
proceeds of private placements of equity, equity-related and debt securities of Two Rivers Water & Farming Company and subsidiaries;
|
|
●
|
cash flow 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 September 30, 2019, we had cash
and cash equivalents of approximately $401,000. Cash flow used in our operating activities totaled approximately $789,000 for the
nine months ended September 30, 2019 compared to operating activities using approximately $824,000 for the nine months ended September
30, 2018.
As of September 30, 2019, we had approximately
$481,000 in current assets and approximately $21,585,000 in current liabilities. A large portion of the current liabilities ($7,373,000)
is from the HCIC seller carryback notes, some of which were due June 30, 2016. As of September 30, 2019, we continue to be in default
on the HCIC note payments. As a result, the entire amount of the notes has been classified as current.
Cash provided by investing activities was approximately
$23,000 for the nine months ended September 30, 2019 compared to cash used in investing activities of approximately $30,000 for
the nine months ended September 30, 2018.
Cash provided by financing activities was approximately
$1,161,000 for the nine months ended September 30, 2019 compared to cash provided of approximately $894,000 for the nine months
ended September 30, 2018.
Due to our financial
condition, we have had to resort to borrowing under short-term convertible notes, which have high financing costs associated with
them. On September 24, 2019, we executed a convertible promissory note in the principal amount of $575,000 had a purchase price
of $517,500, a 6-month term, and an interest rate of 10% per annum. Net proceeds were approximately $457,500. The debt is convertible
at a per common stock price at the lower of 70% multiplied by the 10-day trailing market price of Two Rivers’ common shares
(representing a discount rate of 30%) or $0.30/share. We issued 1,101,532 shares of our common stock (the “Returnable Shares”)
to the note holder, as well as an additional 220,306 shares of Common Stock (the “Commitment Shares”), subject to the
terms and conditions of the securities purchase agreement and the note, pursuant to the exemption from registration contained in
Section 4(a)(2) of the Securities Act of 1933. If Two Rivers pays the convertible debt prior to 180 days from the date of the convertible
note, the Returnable Shares shall be returned by the note holder to Two Rivers. If Two Rivers fails to pay the convertible note
by that date, the note holder may retain the Returnable Shares.
On November 7,
2019, we entered into a similar convertible note arrangement to provide a net of $315,000 in short term working capital. The
face value of the convertible debt is $394,500 with a purchase price of $354,600, a 6-month term and an interest rate of 12%
per annum. The debt is convertible at a price equal to the lower of (1) 70% multiplied by the lowest closing bid price or
trading price (whichever is lower) of Two Rivers’ common shares during the 10 trading days immediately preceding the
conversion date (representing a discount rate of 30%) and (2) $0.30 per share. We issued 1,083,791 shares of our common stock
(the “Returnable Shares”) to the note holder, as well as an additional 200,000 shares of Common Stock (the
“Commitment Shares”), subject to the terms and conditions of the securities purchase agreement and the note,
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933. If Two Rivers pays
the convertible debt prior to 180 days from the date of the convertible note, the Returnable Shares shall be returned by the
Note Holder to Two Rivers. If Two Rivers fails to pay the convertible note by that date, the Note Holder may retain the
Returnable Shares.
We intend to use these
funds for the payment of certain debts, payments on accounts and working capital.
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 $1,142,000 during the nine months ended September 30, 2019. Cash consumed from our operations during the nine months
ended September 30, 2019 was $789,000. At September 30, 2019, the Company had a working capital deficit of $21,104,000 and an accumulated
deficit of approximately $95,596,000. 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.
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.
Critical Accounting Policies
We have identified the policies below as critical
to our business operations and the understanding of our results from operations. The impact and any associated risks related to
these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations” where such policies affect our reported and expected financial results. For a detailed
discussion of the application of these and other accounting policies, see Note 2 of the notes to condensed consolidated financial
statements included elsewhere in this Form 10-Q. Our preparation of such condensed consolidated financial statements and this Form
10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure
of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses
during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Revenue Recognition
We follow specific and detailed guidelines
in measuring revenue; however, certain judgments may affect the application of our revenue policy. Revenue results are difficult
to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses.
Goodwill and Intangible Assets
We have acquired water shares in Huerfano-Cucharas
Irrigation Company, which is considered an intangible asset and shown on our balance sheet as part of “Water assets”.
Currently, these shares are recorded at purchase price less our pro rata share of the negative net worth in HCIC Holdings, LLC.
Management evaluates the carrying value, and if necessary, will establish an impairment of value to reflect current fair market
value.
In conjunction with the acquisition of Vaxa,
the Company recognized goodwill of approximately $14,100,000 based on the issuance of 30,000,000 shares at the closing share price
($0.44) on the date of acquisition (July 31, 2019) plus net liabilities acquired (See NOTE 8).
Impairment Policy
At least once every year, management examines
all of our assets for proper valuation and to determine if an impairment is necessary. In terms of real estate owned, this impairment
examination also includes the accumulated depreciation. Management examines market valuations and if an additional impairment is
necessary for lower of cost or market, then an impairment charge is recorded.