TWO RIVERS WATER & FARMING COMPANY Unless the context requires otherwise, references in this Form 10-Q to "we," "our," "us" and similar terms refer toTwo 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 endedDecember 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 theSecurities 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
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.
26
The following table presents our holdings of storage water rights:
Average Estimate of
Annual Decreed Current
Yield Amount Effective
Elevation Priority No. Appropriation Date (A.F.) (A.F.) 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
Cucharas Valley Reservoir 5,705 ft 66c2 3/14/1906
34,404 restriction1
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
Vaxa owns a 100% membership interest in each of
? 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 productsto 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, theCucharas Valley Reservoir has Conditional rights to 34,404 A.F. of additional storage. 27 Results of Operations
For the Three Months Ended
During the three months ended
Operating expenses during the three months endedSeptember 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 endedSeptember 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
During the three months ended
As the result of the foregoing, the net profit attributed to our common
shareholders for the three months ended
InDecember 2018 , a contingent liability was established regarding theState 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 . InJuly 2019 , the Company reached a settlement with theState of Colorado , whereby the Company will pay approximately$1,000,000 plus interest to theState of Colorado in exchange for a full settlement of the above legal action. In the three months endingSeptember 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
During the nine months ended
Operating expenses during the nine months endedSeptember 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 endedSeptember 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 theGrowCo deconsolidation. During the nine months endedSeptember 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
28 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 endedSeptember 30, 2019 was$1,142,000 loss, compared to a profit of$6,046,000 for the nine months endedSeptember 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 andFebruary 2019 , the Company engaged in discussions with theVaxa 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 onJuly 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 ofSeptember 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 endedSeptember 30, 2019 compared to operating activities using approximately$824,000 for the nine months endedSeptember 30, 2018 . As ofSeptember 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 dueJune 30, 2016 . As ofSeptember 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 endedSeptember 30, 2019 compared to cash used in investing activities of approximately$30,000 for the nine months endedSeptember 30, 2018 .
Cash provided by financing activities was approximately
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. OnSeptember 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. 29
OnNovember 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 endedSeptember 30, 2019 . Cash consumed from our operations during the nine months endedSeptember 30, 2019 was$789,000 . AtSeptember 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. 30 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.
We have acquired water shares inHuerfano-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 inHCIC 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.
© Edgar Online, source
