NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Six Months Ended June 30, 2017 and June 30, 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 June 30, 2017,
we owned 7,012 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 six months ended June 30, 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
six months ended June 30, 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 structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an expected completion in late 2017 or early 2018.
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, 1.00
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 2017 with substantially the
same terms for the purposes of finishing the second greenhouse. As of August 7, 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 Redev’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 six months ended June 30, 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.
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
TR Capital
|
|
$
|
20,482,000
|
|
|
$
|
20,552,000
|
|
HCIC
|
|
|
1,371,000
|
|
|
|
1,381,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(352,000
|
)
|
|
|
(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
|
|
|
253,000
|
|
|
|
—
|
|
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
|
|
$
|
32,373,000
|
|
|
$
|
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 six 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
|
|
|
June
30,
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
|
|
|
|
381,000
|
|
|
|
1,632,000
|
|
Irrigation system
|
|
|
10
|
|
|
|
—
|
|
|
|
995,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
15,000
|
|
|
|
393,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
597,000
|
|
|
|
3,201,000
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(371,000
|
)
|
|
|
(1,842,000
|
)
|
Net book value
|
|
|
|
|
|
$
|
226,000
|
|
|
$
|
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. Our lease with Johnny Cannaseed, our current tenant, is also classified as an operating lease.
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 six months ended June 30, 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 126,000 RSUs, 6,163,315 options, and 16,461,663 warrants at June 30, 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:
|
|
Six
Months Ended
June 30,
2017
|
|
|
Year
Ended
December 31,
2016
|
|
Beginning balance
|
|
$
|
3,520,000
|
|
|
$
|
4,684,000
|
|
Additions
|
|
|
433,000
|
|
|
|
2,495,000
|
|
Finished - Transferred
|
|
|
(58,000
|
)
|
|
|
(3,659,000
|
)
|
Ending Balance
|
|
$
|
3,895,000
|
|
|
$
|
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:
|
|
|
June
30, 2017
|
|
|
|
Dec.
31, 2016
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
Principal
Balance
|
|
|
|
Accrued
Interest
|
|
|
|
Principal
Balance
|
|
|
|
Interest
Rate
|
|
|
|
Security
|
|
HCIC
seller carry back
|
|
$
|
6,434,000
|
|
|
$
|
179,000
|
|
|
$
|
6,645,000
|
|
|
|
6
|
%
|
|
|
Shares
in the Mutual Ditch Company
|
|
CWCB
|
|
|
748,000
|
|
|
|
10,000
|
|
|
|
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
|
|
|
|
6.0
|
%
|
|
|
Unsecured
|
|
FirstOak
Bank - Mater
|
|
|
—
|
|
|
|
—
|
|
|
|
156,000
|
|
|
|
(1
|
)
|
|
|
Secured
by Mater assets purchased
|
|
McFinney
Agri-Finance
|
|
|
524,000
|
|
|
|
—
|
|
|
|
625,000
|
|
|
|
6.8
|
%
|
|
|
2,579
acres of pasture land in Ellicott Colorado
|
|
GrowCo,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GrowCo
$4M notes
|
|
|
4,000,000
|
|
|
|
403,000
|
|
|
|
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
|
|
|
|
227,000
|
|
|
|
2,010,000
|
|
|
|
22.5
|
%
|
|
|
Various
land and water assets
|
|
GrowCo
$7M exchange notes
|
|
|
2,977,000
|
|
|
|
154,000
|
|
|
|
2,677,000
|
|
|
|
10.0%-22.5
|
%
|
|
|
Various
land and water assets
|
|
GrowCo
$2M exchange notes
|
|
|
1,224,000
|
|
|
|
33,000
|
|
|
|
—
|
|
|
|
22.5
|
%
|
|
|
Various
land and water assets
|
|
GrowCo
Short Term Loan
|
|
|
25,000
|
|
|
|
—
|
|
|
$
|
25,000
|
|
|
|
22.5
|
%
|
|
|
Unsecured
|
|
Hemp
Loan
|
|
|
—
|
|
|
|
—
|
|
|
|
71,000
|
|
|
|
18.0
|
%
|
|
|
Unsecured
|
|
Two
Rivers Short Term Loan
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18.0
|
%
|
|
|
Unsecured
|
|
Two
Rivers Short Term Loan
|
|
|
300,000
|
|
|
|
30,000
|
|
|
|
—
|
|
|
|
20.0
|
%
|
|
|
Unsecured
|
|
WaterRedev.
Convertible Note
|
|
|
200,000
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
12.0
|
%
|
|
|
Pasture
land near Colorado Springs Colorado
|
|
Equipment
loans
|
|
|
222,000
|
|
|
|
—
|
|
|
|
300,000
|
|
|
|
5
- 8
|
%
|
|
|
Specific
equipment
|
|
Total
|
|
|
18,789,000
|
|
|
$
|
1,049,000
|
|
|
|
18,886,000
|
|
|
|
|
|
|
|
|
|
Less:
HCIC discount
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Less:
GrowCo discount
|
|
|
(440,000
|
)
|
|
|
|
|
|
|
(530,000
|
)
|
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(13,104,000
|
)
|
|
|
|
|
|
|
(12,590,000
|
)
|
|
|
|
|
|
|
|
|
Long
term portion
|
|
$
|
5,245,000
|
|
|
|
|
|
|
$
|
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 June
30, 2017 and December 31, 2016, the total debt discount was $439,000 and $530,000, respectively.
HCIC
Carry Back Loan
For
the six months ended June 30, 2017, the Company is in technical default on $5,934,000 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 June 30, 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):
|
|
Six
Months Ended June 30, 2017
|
|
|
Six
Months Ended June 30, 2016
|
|
|
|
Parent
(Two
Rivers)
|
|
|
Farms
(DFP)
|
|
|
Greenhouse
(GrowCo., GCP1,
GCP2)
|
|
|
Water
(TR Cap)
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,859
|
|
|
$
|
24
|
|
|
$
|
1,883
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
58
|
|
Less:
direct cost of revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
Margin
|
|
|
—
|
|
|
|
—
|
|
|
|
1,859
|
|
|
|
24
|
|
|
|
1,883
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
33
|
|
|
|
58
|
|
Total
Operating Expenses
|
|
|
(433
|
)
|
|
|
—
|
|
|
|
(207
|
)
|
|
|
(185
|
)
|
|
|
(825
|
)
|
|
|
(555
|
)
|
|
|
—
|
|
|
|
(1,620
|
)
|
|
|
(32
|
)
|
|
|
(2,207
|
)
|
Total
Other Income (Expense)
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(1,020
|
)
|
|
|
(47
|
)
|
|
|
(1,098
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(447
|
)
|
|
|
(312
|
)
|
|
|
(760
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
(464
|
)
|
|
|
—
|
|
|
|
632
|
|
|
|
(208
|
)
|
|
|
(40
|
)
|
|
|
(556
|
)
|
|
|
—
|
|
|
|
(2,042
|
)
|
|
|
(311
|
)
|
|
|
(2,909
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
(Loss) from discontinued operations
|
|
|
—
|
|
|
|
(1,081
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,081
|
)
|
|
|
—
|
|
|
|
(390
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(390
|
)
|
Net
(Loss) from Operations
|
|
|
(464
|
)
|
|
|
(1,081
|
)
|
|
|
632
|
|
|
|
(208
|
)
|
|
|
(1,121
|
)
|
|
|
(556
|
)
|
|
|
(390
|
)
|
|
|
(2,042
|
)
|
|
|
(311
|
)
|
|
|
(3,299
|
)
|
Preferred
dividends
|
|
|
(987
|
)
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
(5
|
)
|
|
|
(1,195
|
)
|
|
|
(948
|
)
|
|
|
—
|
|
|
|
(295
|
)
|
|
|
—
|
|
|
|
(1,243
|
)
|
Non-controlling
interest
|
|
|
—
|
|
|
|
—
|
|
|
|
146
|
|
|
|
(3
|
)
|
|
|
143
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Net
(Loss)
|
|
$
|
(1,451
|
)
|
|
$
|
(1,081
|
)
|
|
$
|
574
|
|
|
$
|
(215
|
)
|
|
$
|
(2,173
|
)
|
|
$
|
(1,504
|
)
|
|
$
|
(390
|
)
|
|
$
|
(2,337
|
)
|
|
$
|
(319
|
)
|
|
$
|
(4,550
|
)
|
Segment
Assets
|
|
$
|
1,362
|
|
|
$
|
—
|
|
|
$
|
11,489
|
|
|
$
|
34,416
|
|
|
$
|
47,267
|
|
|
$
|
1,925
|
|
|
$
|
7,691
|
|
|
$
|
7,689
|
|
|
$
|
31,962
|
|
|
$
|
49,267
|
|
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.
|
|
●
|
The
suspension 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 six months ended June 30, 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.
|
|
●
|
On
June 29, 2017 a mediation session was held in Colorado Springs between all parties involved
with the Suncanna lawsuit along with each party’s legal counsel. To date, no settlement
has been proposed.
|
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 June 30, 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 six months ended June 30, 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 June 30, 2017 and December 31, 2016 consist of the following:
Assets of discontinued
operations held for sale:
|
|
|
June
30,
2017
|
|
|
|
December
31,
2016
(as re-stated)
|
|
Cash
|
|
$
|
—
|
|
|
$
|
6,000
|
|
Accounts
receivable
|
|
|
—
|
|
|
|
37,000
|
|
Deposits
and other current assets
|
|
|
—
|
|
|
|
57,000
|
|
Land
and equipment
|
|
|
—
|
|
|
|
2,685,000
|
|
Total
assets
|
|
$
|
—
|
|
|
$
|
2,785,000
|
|
Liabilities of discontinued operations held
for sale
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
159,000
|
|
|
$
|
777,000
|
|
Accrued
liabilities
|
|
|
—
|
|
|
|
42,000
|
|
Notes
payable
|
|
|
98,000
|
|
|
|
2,022,000
|
|
Total
Liabilities
|
|
$
|
257,000
|
|
|
$
|
2,841,000
|
|
The income from discontinued operations presented in the statements
of operations consist of the following for the six months ended June 30, 2017 and June 30, 2016:
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
127,000
|
|
Cost of goods sold
|
|
|
—
|
|
|
$
|
102,000
|
|
General and administrative expenses
|
|
|
353,000
|
|
|
|
115,000
|
|
Depreciation and amortization
|
|
|
1,000
|
|
|
|
240,000
|
|
Interest
|
|
|
41,000
|
|
|
|
60,000
|
|
Other (loss on disposal of assets and intangibles)
|
|
|
686,000
|
|
|
|
—
|
|
Total
|
|
$
|
(1,081,000
|
)
|
|
$
|
(390,000
|
)
|
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 June 30, 2017, the Company has a working capital deficit and a stockholders’ deficit
of approximately $17,394,000 and $86,432,000, 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-days 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 makes the debt re-financeable.
Since December 31, 2016 to August 7, 2017
the Company has collected $1,346,000 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 third quarter of 2017, GrowCo began 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 $200,000 has been raised in a second round of preferred investment in Water Redevelopment. The Company has signed a term
sheet with an investment banking firm on July 27 for the establishment of an equity line of credit line that will provide up to
$100,000 per month in capital to the Company by selling new registered shares of the Company stock into the public market. Definitive
documents are expected to be signed by August 17. The Company has entered into discussions with an investment banking firm regarding
the issuance of a private placement for our Water Redev subsidiary followed by a Regulation A Plus offering which combined is expected
to raise up to $10,000,000 in the second half 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 Six Months Ended June 30, 2017
the following related party transactions occurred:
|
●
|
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 6/30/17 was $1,050K, with total
outstanding AR $2,015K.
|
|
●
|
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 $13,294.
|
|
●
|
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 $10.5 M in GrowCo securities.
|
|
●
|
The Chief Executive Officer of Two Rivers serve as the only members of the Sunset Metropolitan
District (Sunset). Sunset is a quasi-governmental agency operating under Title 32 of the State of Colorado Constitution. As of
June 30, 2017, the Company had advanced $80,000 to Sunset.
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On June 29, 2017 a mediation session was held in Colorado
Springs between all parties involved with the Suncanna lawsuit along with each party’s legal counsel. To date, no settlement
has been proposed.
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The Company leases it’s former corporate headquarters office space to Johnny Cannaseed. Total
lease payments are $47,000 per year.
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NOTE 11 – SUBSEQUENT EVENTS
Pursuant to ASC 855, management has evaluated
all events and transactions that occurred from
June 30, 2017
through the date of issuance
of these financial statements. During this period, we had the following significant subsequent events:
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On July 27, the Company signed a term sheet whereby the
Company will
issue registered shares of stock to an accredited
investment banking firm in return for advances against an equity line of
credit. The Company will receive up to $100,000 per month to be used for working capital.
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On July 11, 2017, the Company and its related party tenant Johnny Cannaseed executed a First Amendment
to the GCP1 lease agreement whereby the payment terms were changed to a seven month rent deferral and accrual from five months
for one half of the greenhouse. Another first amendment was executed for the second half of the GCP1 lease agreement whereby the
payment terms were changed to an eight month rent deferral and accrual from five months.
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On July 12, 2017, the Board approved a request from HCIC warrant holders to exercise up to 50%
of their warrants, at a reduced price to be established as the closing price on July 21, 2017, in exchange for a corresponding
reduction in debt. Three warrant holders exercised a total of 287,750 warrants at a price of $0.2672 per share resulting in a $76,887
reduction in HCIC debt.
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On July 19, Joe McKowen, son of former Two Rivers CEO John McKowen, was elected to the GrowCo board
of directors and was named company treasurer.
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Wayne Harding, Company CEO provided a loan to the company on August 4, 2017 of $50,000. A previous
loan of $25,000 plus interest was retired upon issuance of the new loan. The loan is for two years, is secured by land assets of
the Company and carries an interest rate of 18%. On August 8, 2017 an investor in the Company loaned the Company $200,000 under
the same terms.
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