NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended March 31, 2017 and March 31, 2016
(Unaudited)
NOTE
1 – ORGANIZATION AND BUSINESS
Unless
the context requires otherwise, references in these notes to “Two Rivers,” the “Company,” “we,”
“our,” “us” and similar terms are to Two Rivers Water & Farming Company and its subsidiaries.
Corporate
Evolution
In
2014, we formed a new company, TR Capital Partners, LLC or TR Capital, which issued all its common units to Two Rivers Water &
Farming Company, and our direct and indirect subsidiaries entered into a series of related transactions as the result of which
assets and operations of those subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates
or controls all of the operations formerly conducted by those subsidiaries, and we classify TR Capital as Two Rivers Water &
Farming Company for purposes of our financial statements. Two Rivers has divided its operations into our traditional lines of
business of farming and water, which are operated by us, and our cannabis-focused business, which is operated by our subsidiary
GrowCo, Inc., or GrowCo.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of March 31, 2017,
we owned 7,169 gross acres.
In
May 2014 we formed GrowCo, which issued 20,000,000 shares of its common stock to Two Rivers. In August 2014, we announced that
we were reserving 10,000,000 of the GrowCo shares for distribution to holders of our Common Stock as of four record dates (January
1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after a registration statement covering GrowCo common shares has been
filed and declared effective, which has not yet occurred. On each record date, we recorded a pending distribution of 2,500,000
GrowCo common shares on a pro rata basis to holders of Common Stock.
On January 20, 2015, GrowCo Partners 1,
LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which consists of a 90,000 square foot greenhouse
and 15,000 square foot processing and warehouse facility on 40 acres of land. GCP1’s greenhouse was partially occupied in
September with lease revenue beginning September 1, 2015. On April 14, 2016, we received notice from the Marijuana Enforcement
Division of the Colorado Department of Revenue that the then current tenant, Suncanna, LLC (“Suncanna”), had received
a suspension order. This suspension, in addition to non-payment of back due lease payments owed, caused Suncanna to be in violation
of its lease with GCP1. Therefore, GCP1 began the eviction process against Suncanna. Due to the eviction process, during the three
months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related Party, wrote off $587,000 in advances
to Suncanna, and did not recognize any Lease Revenues – Related Party. During the three months ended March 31, 2016, we
recognized $25,000 in greenhouse lease revenue from a payment received from Suncanna in early April 2016. The total write off
of $1.330 million was partially offset by a $350,000 reduction in the amount owed to the GCP1 preferred unit holders. On July
22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate GCP1’s
greenhouse by September 6, 2016. On August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County
Colorado District Court against GrowCo, GrowCo Business Development, LLC., GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers
and certain current and former employees, and associates. The Company believes that the suit has no merit and will have no material
impact on the Company’s financial condition.
Our
second greenhouse project will also consist of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse
facility on an additional 40 acres of land. Upon completion, this project will be operated, as a landlord, by GrowCo Partners
2, LLC, or GCP 2. GCP 2’s greenhouse will share some facilities (e.g., boiler, water, generator) whereby costs might be
shared with GCP 1. GCP 2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an expected completion in the second half of 2017.
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of debt securities, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
December 2015, GrowCo completed a $5.1 million private placement of equity interests of GCP Super Units, LLC, which will invest
directly in various assets of GrowCo, with proceeds to be used to complete the construction of the first greenhouse, partially
fund the second greenhouse and provide working capital. Our investment in GCP Super Units, LLC is reflected on our balance sheet
as a non-controlling equity interest.
In
the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of
up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts
of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, 0.25
GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version
of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000
principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.
As of March 7, 2017, GrowCo had raised $5.0 million, including the $200,000 of notes issued in exchange for the earlier offered
notes, at which time the offering was closed. A new $2M offering was subsequently initiated in March of 2017 with substantially
the same terms for the purposes of finishing the second greenhouse. As of May 12, 2017, $1,000,000 had been raised in this new
offering.
Water
Redevelopment Company
We
formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets
from the rest of our business and to enable additional raising of capital for the purpose of investing in our water assets. Water
Redevelopment Company is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management
and delivery. Water is one of the most basic, core assets. Water Redevelopment’s first area of focus is in the Huerfano-Cucharas
river basin in southeastern Colorado.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Two Rivers along with its farming, water and
greenhouse operations. All significant inter-company balances and transactions have been eliminated in consolidation.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S.
GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information
not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results
for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended
December 31, 2017. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s
consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2016, as filed with the Securities and Exchange Commission on March 30, 2017.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
TR Capital
|
|
$
|
20,588,000
|
|
|
$
|
20,552,000
|
|
HCIC
|
|
|
1,380,000
|
|
|
|
1,381,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(264,000
|
)
|
|
|
(206,000
|
)
|
GrowCo Partners 1,
LLC
|
|
|
3,601,000
|
|
|
|
3,621,000
|
|
GCP Super Units, LLC
|
|
|
4,923,000
|
|
|
|
4,923,000
|
|
Water Redevelopment
Company, LLC
|
|
|
252,000
|
|
|
|
—
|
|
TR Cap 20150630 Distribution,
LLC
|
|
|
497,000
|
|
|
|
497,000
|
|
TR Cap 20150930 Distribution,
LLC
|
|
|
460,000
|
|
|
|
460,000
|
|
TR Cap 20151231 Distribution,
LLC
|
|
|
495,000
|
|
|
|
495,000
|
|
Totals
|
|
$
|
32,575,000
|
|
|
$
|
32,366,000
|
|
In
2015, $152,000 of TR Capital Preferred Membership units were exchanged, pursuant to a pre-existing exchange agreement, for Two
Rivers’ common shares and $60,000 of Two Rivers Farms F-2, Inc. (“F-2”) membership units converted into Two
Rivers’ common shares. Two Rivers also formed three LLC special entities (TR Cap 20160630 Distribution, TR Cap 20160930
Distribution, and TR Cap 20161231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership
units.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, Two Rivers considers cash and cash equivalents to include highly liquid investments with original
maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in
interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial
instruments.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method
over the estimated useful life of each type of asset, which ranges from three to twenty-seven and a half years. Maintenance and
repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the
related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged
to income.
Below
is a summary of premises and equipment:
Asset
Type
|
|
Life
in Years
|
|
|
March
31,
2017
|
|
|
December
31,
2016
|
|
Office
equipment, furniture
|
|
|
5
– 7
|
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
Computers
|
|
|
3
|
|
|
|
47,000
|
|
|
|
47,000
|
|
Vehicles
|
|
|
5
|
|
|
|
136,000
|
|
|
|
116,000
|
|
Farm equipment
|
|
|
7
– 10
|
|
|
|
1,852,000
|
|
|
|
1,632,000
|
|
Irrigation system
|
|
|
10
|
|
|
|
995,000
|
|
|
|
995,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
15,000
|
|
|
|
393,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
3,063,000
|
|
|
|
3,201,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(1,786,000
|
)
|
|
|
(1,842,000
|
)
|
Net book value
|
|
|
|
|
|
$
|
1,277,000
|
|
|
$
|
1,359,000
|
|
Land
Land
acquired for farming or water rights is recorded at cost. Expenditures for leveling the land are added to the cost of the land.
Irrigation is not capitalized in the cost of Land (
Property and Equipment
above). Land is not depreciated. However, once
per year, Management will assess the value of land held, and in their opinion, if the land has become impaired, Management will
establish an allowance against the land.
Water
Rights and Infrastructure
Management
periodically evaluates the carrying value of its assets including water rights and infrastructure, and if the carrying value is
in excess of fair market value, the Company will establish an impairment allowance. Currently, there is a $30,000 impairment reserve
on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.
Intangibles
Two
Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in Huerfano Cucharas
Irrigation Company (“HCIC”) and Orlando Reservoir No. 2 Company, LLC (“Orlando”). These intangible assets
will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including
the historical upward valuation of water rights within Colorado.
Revenue
Recognition
Lease Revenues
The lease between GCP1, a subsidiary of
TR Cap, and its related party lessee, Suncanna, was classified as an operating lease under ASC 840. GrowCo’s lease with Suncanna
did not meet any of these criteria.
On April 14, 2016, we received notice from
the Marijuana Enforcement Division of the Colorado Department of Revenue that Suncanna had received a suspension order. This caused
Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 began an eviction process against Suncanna. Due to the eviction
process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related Party, wrote off
$587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. The total write off of $1.330
million is partially off-set by a $350,000 reduction in the amount owed to the GCP1 preferred unit holders.
On July 22, 2016 GCP1 received a court
ordered Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna, the Company’s then tenant
in its marijuana-focused greenhouse, to vacate the greenhouse by September 6, 2016. On September 6, 2016 the Company took possession
of the greenhouse and began re-conditioning it for the new tenant which began growing operations in one half of the greenhouse
in December 2016.
Member
Assessments
Once
per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment
per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half
of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to
HCIC are eliminated in consolidation of the condensed consolidated financial statements. The assessments that are not eliminated
are included in Other revenue.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
Stock
Based Compensation
Beginning
January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC
718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period,
which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not
revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding
as of the effective date and are subsequently modified.
Net
(Loss) per Share
Basic
net loss per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the
period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed
by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during
the period.
The
dilutive effect of the outstanding 244,000 RSUs, 6,163,315 options, and 16,461,663 warrants at March 31, 2017, has not been included
in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases”. The new standard
establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet
for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning
after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected
to result in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management
believes that this ASU will have an impact on its financials and is in the process of analyzing its impact.
In
August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09,
“
Revenue from Contracts with Customers
”, which amended revenue recognition guidance to clarify the principles
for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record
the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled
in exchange for those goods or services. Expanded additional disclosures are required relating to the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative
disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from
the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in
the first quarter of fiscal year 2018 using one of two prescribed retrospective methods. Early adoption is not permitted.
At this point, due to the Company having no revenue contracts with customers, except for leasing agreements, Management believes
that there will be no material impact on its financial statements.
Management
does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material
effect on the accompanying consolidated financial statements.
NOTE
3 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon
purchasing land, the value is recorded at the purchase price or fair value, whichever is more appropriate. Costs incurred to prepare
the land for the intended purpose are also capitalized in the recorded cost of the land. No amortization or depreciation is taken
on land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for
any potential impairments.
Water
Rights and Infrastructure
The
Company has acquired both direct flow water rights and water storage rights. It has obtained water rights through the purchase
of shares in a mutual ditch company, which it accomplished through its purchase of shares in HCIC, or through the purchase of
an entity holding water rights, which it effected through its purchase of a membership interest of Orlando. The Company may also
acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court
and administered under the jurisdiction of the Office of the State Engineer.
Subsequent
to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair
market value, the Company will establish an impairment allowance. Currently, there are no impairments on the Company’s land
and water shares. No amortization or depreciation is taken on the water rights.
GrowCo,
GCP1, GCP2 Greenhouse Construction in Progress
Construction
costs are capitalized, and not amortized or depreciated until the construction is completed in accordance with ASC 360 and 835.
The Company has completed the construction of its first greenhouse (90,000 square feet plus a 1,000 square feet boiler/mechanical
room) and related warehouse facilities (15,000 square feet).
Construction
costs are as follows:
|
|
Three
Months Ended
March 31,
2017
|
|
|
Year
Ended
December 31,
2016
|
|
Beginning
balance
|
|
$
|
3,520,000
|
|
|
$
|
4,684,000
|
|
Additions
|
|
|
435,000
|
|
|
|
2,495,000
|
|
Finished
- Transferred
|
|
|
(58,000
|
)
|
|
|
(3,659,000
|
)
|
Ending
Balance
|
|
$
|
3,897,000
|
|
|
$
|
3,520,000
|
|
The
Company estimates an additional expenditure of $3.5 million is required for the completion of the GCP2 greenhouse and warehouse.
NOTE
4 – NOTES PAYABLE
Below
is a summary of the Company’s consolidated long term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
2017
|
|
|
Dec.
31,
2016
|
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Principal
Balance
|
|
|
Interest
Rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,484,000
|
|
|
$
|
147,000
|
|
|
$
|
6,645,000
|
|
|
|
6
|
%
|
|
Shares
in the Mutual Ditch Company
|
CWCB
|
|
|
798,000
|
|
|
|
23,000
|
|
|
|
798,000
|
|
|
|
2.5
|
%
|
|
Certain Orlando and
Farmland assets
|
FirstOak
Bank - Dionisio Farm
|
|
|
—
|
|
|
|
—
|
|
|
|
771,000
|
|
|
|
(1
|
)
|
|
Dionisio farmland
and 146.4 shares of Bessemer Irrigating Ditch Company Stock, well permits
|
FirstOak
Bank - Dionisio Farm
|
|
|
—
|
|
|
|
—
|
|
|
|
118,000
|
|
|
|
(2
|
)
|
|
Dionisio farmland
and 9 shares of Bessemer Irrigating Ditch Company Stock, well permits, water leases
|
Seller
Carry Back - Dionisio
|
|
|
590,000
|
|
|
|
4,000
|
|
|
|
590,000
|
|
|
|
6.0
|
%
|
|
Unsecured
|
FirstOak
Bank - Mater
|
|
|
—
|
|
|
|
2,000
|
|
|
|
156,000
|
|
|
|
(1
|
)
|
|
Secured by Mater
assets purchased
|
McFinney
Agri-Finance
|
|
|
623,000
|
|
|
|
—
|
|
|
|
625,000
|
|
|
|
6.8
|
%
|
|
2,579 acres of pasture
land in Ellicott Colorado
|
GrowCo,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GrowCo
$4M notes
|
|
|
4,000,000
|
|
|
|
293,000
|
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various land and
water assets
|
GrowCo
$1.5M exchange note
|
|
|
100,000
|
|
|
|
8,000
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various land and
water assets
|
GrowCo
$6M exchange notes
|
|
|
2,010,000
|
|
|
|
139,000
|
|
|
|
2,010,000
|
|
|
|
22.5
|
%
|
|
Various land and
water assets
|
GrowCo
$7M exchange notes
|
|
|
2,977,000
|
|
|
|
98,000
|
|
|
|
2,677,000
|
|
|
10.0%-22.5
|
%
|
|
Various land and
water assets
|
GrowCo
$2M exchange notes
|
|
|
625,000
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
22.5
|
%
|
|
Various land and
water assets
|
GrowCo
Short Term Loan
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22.5
|
%
|
|
Unsecured
|
Two
Rivers Short Term Loan
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12.0
|
%
|
|
Unsecured
|
Equipment
loans
|
|
|
238,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
5
- 8
|
%
|
|
Specific equipment
|
Total
|
|
|
18,495,000
|
|
|
$
|
724,000
|
|
|
|
18,886,000
|
|
|
|
|
|
|
|
Less:
HCIC discount
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
Less:
GrowCo discount
|
|
|
(455,000
|
)
|
|
|
|
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(11,533,000
|
)
|
|
|
|
|
|
|
(12,590,000
|
)
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
6,507,000
|
|
|
|
|
|
|
$
|
5,766,000
|
|
|
|
|
|
|
|
(1)
Prime rate + 1%, but not less than 6%.
(2)
Prime rate + 1.5%, but not less than 6%.
The
Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value
of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method. As of March
31, 2017 and December 31, 2016, the total debt discount was $455,000 and $530,000, respectively.
HCIC
Carry Back Loan
For
the three months ended March 31, 2017, the Company is in technical default on $5,984,000 of the HCIC carry back notes due to non-payment
of principle. Consequently, the entire amount of the notes have been classified as current. Management has been in contact with
the various holders about an extension to July 1, 2019. As of March 31, 2017, management has received written commitments to extend
$5,653,000 of these notes to July 1, 2019.
GrowCo
$4M Notes
The
$4.0 million of GrowCo notes are classified as current liabilities. The notes are due April 1, 2020 however, the holders
have the right to request full payment of the principal balance with a 60-day notice.
While we do not expect that
noteholders will request the early principal payment option, we cannot assure you of that result, which would require us to
raise additional funds for early payment.
NOTE
5 –
Information on Business Segments
We
organize our business segments based on the nature of the products and services offered. We focus on the Water and Greenhouse
business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of
businesses: Greenhouse and Water. Greenhouse contains our leasing of state of the art greenhouses to cannabis growers. Water contains
our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations
may differ from those on the face of the income statement. The Farming Business has been discontinued and therefore the operating
losses and assets have been summarized.
In
the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate,
to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments,
and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating
results for each of the segments of the Company are as follows (in thousands):
|
|
Three
Months Ended March 31, 2017
|
|
|
Three
Months Ended March 31, 2016
|
|
|
|
Parent
(Two Rivers)
|
|
|
Farms
(DFP)
|
|
|
Greenhouse
(GrowCo., GCP1, GCP2)
|
|
|
Water
(TR
Cap)
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
536
|
|
|
$
|
6
|
|
|
$
|
542
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Less:
direct cost of revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
Margin
|
|
|
—
|
|
|
|
—
|
|
|
|
536
|
|
|
|
6
|
|
|
|
542
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
Operating Expenses
|
|
|
(155
|
)
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
(170
|
)
|
|
|
(528
|
)
|
|
|
(364
|
)
|
|
|
—
|
|
|
|
(1,176
|
)
|
|
|
(32
|
)
|
|
|
(1,572
|
)
|
Total
Other Income (Expense)
|
|
|
(72
|
)
|
|
|
—
|
|
|
|
(402
|
)
|
|
|
(90
|
)
|
|
|
(564
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(224
|
)
|
|
|
(51
|
)
|
|
|
(275
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
(227
|
)
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
(254
|
)
|
|
|
(550
|
)
|
|
|
(364
|
)
|
|
|
—
|
|
|
|
(1,400
|
)
|
|
|
(83
|
)
|
|
|
(1,847
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
(Loss) from discontinued operations
|
|
|
—
|
|
|
|
(547
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(547
|
)
|
|
|
—
|
|
|
|
(142
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(142
|
)
|
Net
Loss from Operations
|
|
|
(227
|
)
|
|
|
(547
|
)
|
|
|
(69
|
)
|
|
|
(254
|
)
|
|
|
(1,097
|
)
|
|
|
(364
|
)
|
|
|
(142
|
)
|
|
|
(1,400
|
)
|
|
|
(83
|
)
|
|
|
(1,989
|
)
|
Preferred
dividends
|
|
|
(495
|
)
|
|
|
—
|
|
|
|
(181
|
)
|
|
|
—
|
|
|
|
(676
|
)
|
|
|
(453
|
)
|
|
|
—
|
|
|
|
(148
|
)
|
|
|
—
|
|
|
|
(601
|
)
|
Non-controlling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
57
|
|
|
|
1
|
|
|
|
58
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
(Loss)
|
|
$
|
(722
|
)
|
|
$
|
(547
|
)
|
|
$
|
(193
|
)
|
|
$
|
(253
|
)
|
|
$
|
(1,715
|
)
|
|
$
|
(817
|
)
|
|
$
|
(142
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(83
|
)
|
|
$
|
(2,590
|
)
|
Segment
Assets
|
|
$
|
1,593
|
|
|
$
|
699
|
|
|
$
|
10,582
|
|
|
$
|
34,126
|
|
|
$
|
47,000
|
|
|
$
|
1,913
|
|
|
$
|
7,044
|
|
|
$
|
7,214
|
|
|
$
|
31,800
|
|
|
$
|
47,971
|
|
NOTE
6 – LEGAL PROCEEDINGS
In
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
|
●
|
On
April 14, 2016 we were notified that Suncanna LLC had received a notice of suspension
from the Marijuana Enforcement Division of the Colorado Department of Revenue. This suspension
remains in place until a hearing.
|
|
●
|
This
caused Suncanna to be in violation of its lease with GCP1. On April 25, 2016, GCP1 terminated
Suncanna’ s lease and began an eviction process against Suncanna. Due to the eviction
process, during the three months ended March 31, 2016, we wrote off $743,000 in
Lease Revenues – Related Party, wrote off $587,000 in advances to Suncanna, and
did not recognize any Lease Revenues – Related Party.
|
|
●
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District
Court ordering Suncanna to vacate the greenhouse by September 6, 2016.
|
|
●
|
On
August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo
County Colorado District Court against GrowCo, GrowCo Business Development, LLC, GCP1,
GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees,
and associates. We believe that the suit has no merit and will have no material impact
on our financial condition.
|
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse
and GCP1 took possession and began re-conditioning its greenhouse for a new tenant, who
began growing operations in the fourth quarter of 2016.
|
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court
judge ruled in favor of plaintiff Aaron Van Wingerden and against GCP1 in a matter regarding
the prevention of Suncanna’s access to GCP1’s greenhouse prior to Suncanna
vacating the premises on September 6, 2016. We believe that this ruling was in error
and are appealing this decision.
|
Management
believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna
lease agreement.
The
Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders
have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County,
Colorado, and a demand by the State to breach the dam structure. (
Two Rivers Water and Farming Co. vs. Welton Land and Water
Co
., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought certain water rights demands by the neighboring
water rights holders deemed wasteful. In the quarter ending March 31, 2016, the Company entered into a stipulation agreement
with the State, settling the State’s claims, whereby the Company agreed to take the existing dam structure down to the sediment
level. This is anticipated to occur in late 2017. The Company also intends to work with the Colorado State Engineer
to construct a new dam close to the prior dam structure, pending financing. The remainder of the litigation between the
Company and the neighboring water rights holders awaits a trial setting.
NOTE
7 – IMMATERIAL ERROR CORRECTIONS
This
Quarterly Report on Form 10-Q of the Company for the three months ended March 31, 2017, includes the restatement of the Company’s
previously filed consolidated balance sheets for the fiscal year ended December 31, 2016.
The
Company’s management has concluded that in the Assets section of the Balance Sheet, Long Term Assets for Land and Water, and
under Liabilities the Liabilities for Discontinued Operations and Notes Payable, net of current portion were misstated and that
for comparative purposes in 2017 filings these figures should be re-stated but that the adjustments are not material modifications. Accordingly,
the Company has determined that prior financial statements should be corrected, even though such revisions are immaterial with
respect to the prior year financial statements. Furthermore, the Company has determined that correcting prior year
financial statements for immaterial changes would not require previously filed reports to be amended.
Under
Long Term Assets, while the Assets of Discontinued Operations Held for Sale as well as Total Assets were stated correctly, due
to a mis-classification of which assets were being held for sale, Land was understated by $952,000 and Water was overstated by
the same amount. Discontinued Operations - Notes Payable was overstated by $798,000, while Notes Payable, net of current portion
was understated by the same amount due to a loan that was improperly classified as a Liability of Discontinued Operations Held
for Sale. While total assets of discontinued operations held for sale was correctly stated, under Long Term Assets, Land was understated
by $952,000 and Water Assets was overstated by the same amount. Neither Net Income or Shareholders Equity were affected
by these mis-statements. The effect of these restatements on the Company’s 2016 full year balance sheet as reported on the
Form 10-K reports, are as follows:
|
|
December
31,
2016 Previously
Reported
|
|
|
Net
Change
|
|
|
December
31,
2016 (Restated)
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,851
|
|
|
$
|
952
|
|
|
$
|
3,803
|
|
Water
assets
|
|
|
32,135
|
|
|
|
(952
|
)
|
|
|
31,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations held for sale
|
|
|
3,639
|
|
|
|
(798
|
)
|
|
|
2,841
|
|
Notes
Payable, net of current portion
|
|
|
4,758
|
|
|
|
798
|
|
|
|
5,556
|
|
NOTE
8 – DISCONTINUED OPERATIONS
During
the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided
to sell all assets associated with this business due to the sustained losses incurred. The assets and liabilities of the discontinued
operations are presented separately under the captions “Assets of discontinued operations held for sale” and Liabilities
of discontinued operations held for sale,” respectively, in the accompanying Consolidated Balance Sheets at March 31, 2017
and December 31, 2016 consist of the following:
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Assets
of discontinued operations held for sale:
|
|
|
|
|
(as
re-stated)
|
|
Cash
|
|
$
|
—
|
|
|
$
|
6,000
|
|
Accounts
receivable
|
|
|
—
|
|
|
|
37,000
|
|
Deposits
and other current assets
|
|
|
—
|
|
|
|
57,000
|
|
Land
and equipment
|
|
|
699,000
|
|
|
|
2,685,000
|
|
Total
assets
|
|
$
|
699,000
|
|
|
$
|
2,785,000
|
|
Liabilities
of discontinued operations held for sale:
Accounts
payable
|
|
$
|
182,000
|
|
|
$
|
777,000
|
|
Accrued
liabilities
|
|
|
42,000
|
|
|
|
42,000
|
|
Notes
payable
|
|
|
761,000
|
|
|
|
2,022,000
|
|
Total
liabilities
|
|
$
|
985,000
|
|
|
$
|
2,841,000
|
|
The
income from discontinued operations presented in the statements of operations consist of the following for the three months ended
March 31, 2017 and March 31, 2016:
|
|
March
31,
2017
|
|
|
March
31,
2016
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
120,000
|
|
Cost
of goods sold
|
|
|
—
|
|
|
|
50,000
|
|
General
and administrative expenses
|
|
|
88,000
|
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
119,000
|
|
|
|
136,000
|
|
Interest
|
|
|
21,000
|
|
|
|
76,000
|
|
Other
(loss on disposal of assets and intangibles)
|
|
|
319,000
|
|
|
|
—
|
|
Total
|
|
$
|
(547,000
|
)
|
|
$
|
(142,000
|
)
|
On
March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds
from the auction were $1,740,000 with net proceeds of $1,611,000. Proceeds were used to pay off secured debt first with the residual
proceeds used to pay unsecured debt.
NOTE
9 – GOING CONCERN
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not
generated significant revenues and has incurred net losses (including significant non-cash expenses) of approximately $10,700,000
and $6,157,000 during the years ended December 31, 2016 and 2015, respectively. At March 31, 2017, the Company has a working capital
deficit and a stockholders’ deficit of approximately $16,094,000 and $85,959,000, respectively. The HCIC seller carry
back debt is in technical default.
These
factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts
and classification of liabilities that may result should the Company be unable to continue as a going concern. These consolidated
financial statements do not include any adjustments that might arise for this uncertainty. The following paragraphs describe management’s
plans to mitigate.
The
$4M GrowCo Note is classified as current due to the holders’ right to call the note upon 60-day’s notice. We do not
believe at this time that these holders will exercise their call option. The HCIC debt of $6.6 million is secured by water and
land assets that are valued at approximately $24 million. Should the holders of the HCIC debt demand payment, the value of these
assets make the debt re-financeable.
Since
December 31, 2016 to May 12, 2017 the Company has collected $1,000,000 under its GrowCo Exchange Note offerings. On May 2, 2017
the company received the proceeds from an unsecured bridge loan totaling $279,000. Beginning the second quarter of 2017, GrowCo
will begin receiving rent payments on the first greenhouse. The first use of these funds will be to pay GCP1 accounts payable.
Additionally,
we have substantially reduced by general and administrative and cash required for our operations as we have sold our irrigating
farming business and reduced staff.
Management
Plans
The
Company is implementing a new strategy focusing on its water assets along with associated capital raises. On March 13, 2017, we
have raised $257,000 as the first round of preferred funding for our new Water Redevelopment Company. We plan to continue capital
raises to fund our water initiatives. Another $500,000 to $2,000,000 is expected to be raised in a second round of preferred investment
in Water Redevelopment. As of May 12, 2017 we have raised $200,000 in the second round. The company has entered into discussions
with an investment banking firm regarding the issuance of a Regulation A Plus offering which is expected to raise up to $10,000,000
in the second half of 2017. The Company has received a term sheet from the investment banking firm and will execute it in the
second quarter of 2017.
We
believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical
operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However,
we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional
financing, or whether such actions would generate the expected liquidity as currently planned.
NOTE
10 – RELATED PARTY
During
the Three Months Ended March 31, 2017 the following related party transactions occurred:
The
following is a list of all related party transactions during the quarter ended March 31, 2017
|
●
|
Wayne
Harding, Company CEO provided a short term loan to the Company of $25,000. The loan is
secured by land assets of the Company and carries an interest rate of 12%.
|
|
●
|
Advances
totaling $34,400 resulting in a cumulative total of $72,999 for greenhouse expenses to
Johnny Cannaseed, LLC which is majority owned by former Company CEO John McKowen.
|
|
●
|
Accounts
Receivable (AR) to Johnny Cannaseed for the quarter ending 3/31/17 was $536K, with total
outstanding AR $839K.
|
|
●
|
Advances
totaling $26,957 resulting in a cumulative total of $39,505 for greenhouse expense to
McGrow, LLC which is majority owned by former Company CEO John McKowen.
|
|
●
|
Payments
totaling $178,733 to MCG Services, LLC which is majority owned by former Company CEO
John McKowen for costs associated with a services agreement with GrowCo.
|
|
●
|
Advances
to MCG Services, LLC total $8,294
|
|
●
|
Advance of $5,000 to McGrow, LLC for services rendered.
|
|
●
|
Payments
totaling $11,210 to John McKowen for interest expense on a loan held by Mr. McKowen to GrowCo.
|
|
●
|
Existing
investors, including the Thomas Prasil Trust who is a greater than 5% investor, have
invested approximately $9.5 M in GrowCo securities.
|
|
●
|
The Chief Executive Officer of Two Rivers serves as the only member of the Sunset Metropolitan District (Sunset).
Sunset is a quasi-governmental agency operating under Title 32 of the State of Colorado Constitution. As of March 31, 2017, the
Company had advanced $80,000 to Sunset.
|
NOTE
12 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
March
31, 2017
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
On
May 3, 2017 the Company received net proceeds of $279,000 from an unsecured short term
bridge financing loan.
|
|
●
|
On
April 13, 2017 the Company raised $200,000 from a private investor in a Preferred B financing
round for its Water Redevelopment Company.
|