NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Three Months Ended March 31, 2018 and March 31, 2017
(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 December 31,
2017, we own 6,538 gross acres. Gross acres owned decreased from 7,376 gross acres at December 31, 2016 due to the sale of 838
acres.
We
are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets
and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. Our water asset area spans
over 1,900 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of
Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along
the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water
contained therein and serve the community while providing returns to our investors.
Since
October 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest.
We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest
strategically in the assets that will. Specifically, we are selling our irrigated farmland currently used for the production of
produce, the associated Dionisio produce business along with land that no longer serves our strategic vision of water management.
We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In
May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common
stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’
common shareholders based on four record dates (January 1, 2015; April 1, 2015; July 1, 2015, and October 1, 2015) after an effective
registration statement is filed, which has not yet occurred. Each record date will distribute 2,500,000 GrowCo common shares on
a prorata basis of shares owned of Two Rivers’ common shares.
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.
During
the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially
fund the second greenhouse and provide working capital.
In
March 2016, GrowCo completed a $5.5 million private placement of equity interests of GCP Super Units, LLC, which will invest directly
in various assets of GCP1 and GCP2, with proceeds to be used to complete the construction of the first greenhouse, partially fund
the second greenhouse and provide working capital. The outside investment in GCP Super Units, LLC is reflected on our balance
sheet as a non-controlling equity interest.
GCP1’s
greenhouse was partially occupied in September 2015 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. 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. A
court hearing has been set to begin October 16, 2018 in State of Colorado County of Pueblo District Court.
Pending
the eviction of Suncanna, on August 4, 2016 GCP1 entered into a lease agreement with a related party Johnny Cannaseed, LLC, a
related party (“Johnny Cannaseed”) which is owned predominantly by our former CEO John McKowen who is a significant
shareholder in the Company. Under the terms of the lease, one half of the GCP1 greenhouse was sublet to a licensed marijuana grower
on December 1, 2016. The second half of the greenhouse was leased to a second licensed marijuana grower on March 1, 2017.
Johnny
Cannaseed was not able to receive a license to grow marijuana. Therefore, Johnny Cannaseed subleased, with the approval of GCP1’s
board, to two tenants. In 2017, GCP1 expended $308,000 to divide the greenhouse into two, mostly equal, parts, referred to as
GCP1-1 and GCP1-2. For the year ended December 31, 2017, the GCP1-1 tenant paid to Johnny Cannaseed $620,000 which was paid to
GCP1. The GCP1-2 tenant did not pay any rent and was subsequently evicted by Johnny Cannaseed in December 2017. Johnny Cannaseed
is proceeding to collect back due rent from the GCP1-2 tenant. For the year ended December 31, 2017, the Company’s consolidated
income only recognizes the actual rent received of $620,000. Effective February 1, 2018, GCP1 released Johnny Cannaseed from its
lease. At that time, GCP1 signed a lease with the then current sub-lessee of GCP1-1. The GCP1-1 is concurrently in default of
its lease through its late and non-payment of lease payments due GCP1. GCP1 has begun an eviction process of the tenant occupying
GCP1-1.
GrowCo’s
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 GCP2. GCP2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January
2016 with an unknown completion date. It is necessary to raise additional capital to complete GCP2.
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, .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.
A
new $2M offering was subsequently initiated in March 2017 with substantially the same terms of prior GrowCo notes for the purposes
of supporting operations and finishing the second greenhouse. As of December 31, 2017, $1,520,000 was raised for this offering
along with an additional $386,000 under the $7 million exchange note.
During
the three months ended March 31, 2018, GrowCo and its subsidiaries did not raise any additional capital.
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.
Under
guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has
determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, are consolidated for financial statement purposes.
The Company owns a minority position in GrowCo’s common shares, but due to cross collateralization of some of the Company’s
assets, ASC requires 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, 2018 are not necessarily indicative of the results that may be expected for the year ended
December 31, 2018. 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, 2017, as filed with the Securities and Exchange Commission on April 9, 2018.
Non-controlling
Interest
Below
is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
Entity
|
|
3/31/18
|
|
|
12/31/17
|
|
TR
Capital
|
|
$
|
20,482,000
|
|
|
$
|
20,482,000
|
|
HCIC
|
|
|
1,385,000
|
|
|
|
1,388,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
(1,230,000
|
)
|
|
|
(850,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
3,621,000
|
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
5,016,000
|
|
|
|
5,016,000
|
|
Water
Redevelopment Co. LLC
|
|
|
-
|
|
|
|
-
|
|
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
|
|
Total
|
|
$
|
31,369,000
|
|
|
$
|
31,752,000
|
|
Reclassification
Certain
amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications
have been changed.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, Two Rivers considers cash and cash equivalents to include highly liquid investments with original
maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in
interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial
instruments.
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, 2018
|
|
|
December 31, 2017
|
|
Office equipment, furniture
|
|
|
5 – 7
|
|
|
$
|
11,000
|
|
|
$
|
12,000
|
|
Computers
|
|
|
3
|
|
|
|
47,000
|
|
|
|
46,000
|
|
Vehicles
|
|
|
5
|
|
|
|
136,000
|
|
|
|
92,000
|
|
Farm equipment
|
|
|
7 – 10
|
|
|
|
195,000
|
|
|
|
244,000
|
|
Irrigation system
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
Buildings
|
|
|
27.5
|
|
|
|
15,000
|
|
|
|
10,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
411,000
|
|
|
|
411,000
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(263,000
|
)
|
|
|
(251,000
|
)
|
Net book value
|
|
|
|
|
|
$
|
148,000
|
|
|
$
|
160,000
|
|
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.
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 $6,930,000 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
Leasing
Greenhouse
The
lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainty
of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.
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 financial statements.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
HCIC
does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC.
The value of this ownership is significantly greater than the annual assessments.
Stock
Based Compensation
Beginning
January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC
718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period,
which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not
revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding
as of the effective date and are subsequently modified.
All
options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of
adoption.
Net
(Loss) per Share
Basic
net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the
period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed
by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during
the period.
The
dilutive effect of the outstanding 118,000 RSUs, 3,847,500 options, and 16,469,328 warrants at March 31, 2018 and December 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
July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
“
Income Statement – Reporting Comprehensive Income (Topic 220)
”. This ASU deals with the reclassification
of certain tax effects from Accumulated Other Comprehensive Income. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
July 2017, FASB issued ASU “
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815)
”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to
the Company and the impact will be immaterial.
In
November 2016, the FASB issued ASU 2016-18, “
Statement of Cash Flows
”. The new guidance will require that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after
December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company plans to adopt
this new guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial
statements.
In
March 2016, the FASB issued ASU 2016-09, “
Improvements to Employee Share-Based Compensation Accounting
”, which
requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital and treated as
an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election
to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur.
ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified
as a financing activity on the statement of cash flows. The ASU 2016-09 was subsequently updated with ASU 2017-09, issued in May
2017. These standards will become effective for us in fiscal 2018. We do not believe that there will be any significant financial
impact due to prior taxable losses and our net operating loss carry forward.
In
February 2016, the FASB issued 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
November 2015, the FASB issued ASU 2015-17, “
Balance Sheet Classification of Deferred Taxes
”, which requires
that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify
the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption
of this update to have a material impact on its financial statements.
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.
In
April 2015, FASB issued ASU 2015-03, “
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs”.
The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016. Early adoption is allowed for financial statements that have not been previously issued.
Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the
debt liability, similar to the presentation of debt discounts. The Company has elected to adopt this ASU early and is presented
in these financial statements.
In
July 2015, the FASB issued ASU 2015-11, “
Simplifying the Measurement of Inventory
”. Under this ASU, inventory
will be measured at the “lower of cost and net realizable value” and options that currently exist for “market
value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made
to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December
15, 2016. Early application is permitted and should be applied prospectively. Management has early adopted ASU 2015-11 and notes
no material impact on the Company’s financial position or results of operations.
In
August 2014, the FASB issued ASU No. 2014-15, “
Disclosure of Uncertainties About an Entity’s Ability to Continue
as a Going Concern
, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40
Presentation of Financial Statements – Going
Concern”
, by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties
in their financial statements, including requiring management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date of issuance of the entity’s financial statements and providing
certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15
will be effective after December 15, 2016, and early adoption is permitted.
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:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Beginning
balance
|
|
$
|
3,361,000
|
|
|
$
|
3,520,000
|
|
Additions
|
|
|
-
|
|
|
|
506,000
|
|
Finished
- Transferred
|
|
|
-
|
|
|
|
(665,000
|
)
|
Ending
Balance
|
|
$
|
3,361,000
|
|
|
$
|
3,361,000
|
|
The
Company estimates an additional expenditure of $3.5 million is required for the completion of the GCP2 greenhouse and warehouse.
Gain on Disposal of Assets
During the three months ended March 31, 2018, we sold sub-divided,
unimproved lots of land located in El Paso County Colorado and recognized a gain of $80,000.
NOTE
4 – NOTES PAYABLE
Below
is a summary of the Company’s consolidated long term debt:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,301,000
|
|
|
$
|
394,000
|
|
|
$
|
-
|
|
|
$
|
6,301,000
|
|
|
|
6
|
%
|
|
Shares
in the Mutual Ditch Company
|
CWCB
|
|
|
690,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
748,000
|
|
|
|
2.5
|
%
|
|
Certain
Orlando and Farmland assets
|
McFinney
Agri-Finance GrowCo, Inc.
|
|
|
331,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,000
|
|
|
|
6.8
|
%
|
|
2,579
acres of pasture land in Ellicott Colorado
|
GrowCo
$4M notes
|
|
|
4,000,000
|
|
|
|
923,000
|
|
|
|
(35,000
|
)
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$1.5M exchange note
|
|
|
100,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$6M exchange note
|
|
|
1,855,000
|
|
|
|
537,000
|
|
|
|
(61,000
|
)
|
|
|
1,855,000
|
|
|
|
22.5
|
%
|
|
|
GrowCo
$7M exchange note
|
|
|
3,132,000
|
|
|
|
646,000
|
|
|
|
(133,000
|
)
|
|
|
3,132,000
|
|
|
|
10-22.5
|
%
|
|
|
GrowCo
$2M exchange note
|
|
|
1,520,000
|
|
|
|
328,000
|
|
|
|
(83,000
|
)
|
|
|
1,520,000
|
|
|
|
|
|
|
|
General
Note
|
|
|
8,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Bridge
loan Harding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,000
|
|
|
|
|
|
|
|
Powderhorn
|
|
|
619,000
|
|
|
|
-
|
|
|
|
(121,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Third
lien on Ellicott land
|
TURV
Long Term NP
|
|
|
271,000
|
|
|
|
19,000
|
|
|
|
(14,000
|
)
|
|
|
275,000
|
|
|
|
12.0
|
%
|
|
Second
lien on Ellicott land
|
WRC
Convertible NP
|
|
|
300,000
|
|
|
|
26,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
12.0
|
%
|
|
Lien
on water supply agreement
|
Equipment
loans
|
|
|
132,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
5
- 8
|
%
|
|
Equipment
|
OID
Black Mountain
|
|
|
199,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
|
Total
|
|
|
19,458,000
|
|
|
|
2,884,000
|
|
|
|
(447,000
|
)
|
|
|
19,107,000
|
|
|
|
|
|
|
|
Less:
note discounts
|
|
|
(447,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
Less:
Current portion net of discount
|
|
|
(17,979,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,419,000
|
)
|
|
|
|
|
|
|
Long
term portion net of discount
|
|
$
|
1,032,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,238,000
|
|
|
|
|
|
|
|
Notes:
(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, 2018, and December 31, 2017, the total debt discount was $447,000 and $450,000, respectively.
HCIC
Carry Back Loan
For
the three months ended March 31, 2018, 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 has been classified as current.
GrowCo
$4M Notes
During
the year ended December 31, 2015, the Company, through its subsidiary GrowCo, issued $4,000,000 in promissory notes to 17 individual
investors. The notes have a security interest in the land, water and improvements to the 157 acres where GrowCo Partners 1 and
GrowCo Partners 2 are developing the greenhouses. It is through the cross collateralization of assets owned by Two Rivers, that
consolidation of GrowCo into Two Rivers’ financials are required under Accounting Standards Codification Variable Interest
Entities.
The
notes pay 22.5% in annual interest, with interested paid monthly, and are due April 1, 2020. The Company cannot prepay the notes;
however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each note with a 60-day notice
to the Company. Due to this call provision, the net amount of the GrowCo note balance of $4,000,000 is presented as a current
portion of long term debt on the financials.
The
GrowCo notes investors also received one GrowCo common stock $1warrant for each $1invested. These warrants expire on April 30,
2020.
On
January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments
by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint
is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees. Due to the past due interest
owed to the $4M Note holders, these notes are in technical default.
GrowCo
Exchange Notes
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, .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 of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding
as of December 31, 2017.
During
the year ended December 31, 2017, GrowCo raised an additional $1,906,000 under the GrowCo Exchange Notes offering. For the three
months ended March 31, 2018, no additional capital was raised through these notes.
During
the year ended December 31, 2017, the Company incurred $302,000 in debt issuance costs related to its GrowCo Exchange Notes offering.
The debt issuance costs are being amortized via the effective interest method, using 22.5%, over the life of the notes.
Due
to the past due interest owed to the Exchange Note holders, these notes are in technical default.
Powderhorn
Convertible Note
On
February 9, 2018, the Company closed a $675,000 promissory note with Powderhorn I, LP. At the option of the Company, monthly payments
can be made in cash of $66,150 over a 12 month period, or once an S-1 is deemed effective, in the Company’s common shares
a the conversion rate of a discount of 25% of the lowest traded price during the 25 trading days immediately prior to the payment
due date. On May 8, 2018, the Company and Powderhorn modified the Note to allow the pending S-1 registration statement to be withdrawn
and payments to be made in cash at least through August 9, 2018.
OID Black Mountain
During
the three months ended March 31, 2018, the Company issued 374,250 common shares for a principal reduction of $100,000. It was
originally due on October 26, 2017, but has been extended to now being due on May 15, 2018.
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 construction and 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, 2018
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
52
|
|
|
$
|
7
|
|
|
$
|
59
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
536
|
|
|
$
|
6
|
|
|
$
|
542
|
|
Less:
direct cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
-
|
|
|
|
-
|
|
|
|
52
|
|
|
|
7
|
|
|
|
59
|
|
|
|
-
|
|
|
|
-
|
|
|
|
536
|
|
|
|
6
|
|
|
|
542
|
|
Total Operating Expenses
|
|
|
(490
|
)
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
(230
|
)
|
|
|
(870
|
)
|
|
|
(155
|
)
|
|
|
-
|
|
|
|
(203
|
)
|
|
|
(170
|
)
|
|
|
(528
|
)
|
Total
Other Income (Expense)
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
(1,092
|
)
|
|
|
(183
|
)
|
|
|
(1,291
|
)
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
(402
|
)
|
|
|
(90
|
)
|
|
|
(564
|
)
|
Net (Loss) from Operations
Before Income Taxes
|
|
|
(506
|
)
|
|
|
-
|
|
|
|
(1,190
|
)
|
|
|
(406
|
)
|
|
|
(2,102
|
)
|
|
|
(227
|
)
|
|
|
-
|
|
|
|
(69
|
)
|
|
|
(254
|
)
|
|
|
(550
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (Loss) from Operations
|
|
|
(506
|
)
|
|
|
-
|
|
|
|
(1,190
|
)
|
|
|
(406
|
)
|
|
|
(2,102
|
)
|
|
|
(227
|
)
|
|
|
-
|
|
|
|
(69
|
)
|
|
|
(254
|
)
|
|
|
(550
|
)
|
Net (Loss) from Discontinued
Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(547
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(547
|
)
|
Preferred dividends
|
|
|
(493
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
(498
|
)
|
|
|
(495
|
)
|
|
|
-
|
|
|
|
(181
|
)
|
|
|
-
|
|
|
|
(676
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
|
|
3
|
|
|
|
383
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
1
|
|
|
|
58
|
|
Net
(Loss)
|
|
$
|
(999
|
)
|
|
$
|
-
|
|
|
$
|
(810
|
)
|
|
$
|
(408
|
)
|
|
$
|
(2,217
|
)
|
|
$
|
(722
|
)
|
|
$
|
(547
|
)
|
|
$
|
(193
|
)
|
|
$
|
(253
|
)
|
|
$
|
(1,715
|
)
|
Segment
Assets
|
|
$
|
717
|
|
|
$
|
-
|
|
|
$
|
9,338
|
|
|
$
|
28,000
|
|
|
$
|
38,056
|
|
|
$
|
1,593
|
|
|
$
|
699
|
|
|
$
|
10,582
|
|
|
$
|
34,126
|
|
|
$
|
47,000
|
|
NOTE
6 – EQUITY TRANSACTIONS
The
Company has authorized 100,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of March
31, 2018, was 33,124,170 common shares.
During
the three months ended March 31, 2018, Two Rivers issued 374,250 common stock to Black Mountain for a $100,000 in principle reduction
in its Note Payable.
During
the three months ended March 31, 2018, Two Rivers recognized $373,000 in stock based compensation to its employees and directors.
NOTE
7 – LEGAL PROCEEDINGS
Suncanna
Litigation
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.
|
|
●
|
Due
to the suspension order, Suncanna was in violation of its lease agreement with us. On
April 25, 2016, GCP1 terminated Suncanna’s lease and began an eviction process
against Suncanna. Consequently, during the quarter ended March 31, 2016, we stopped recognizing
lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent that
had been recorded as of December 31, 2015. We also wrote off advances to Suncanna totaling
$587,000.
|
|
●
|
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. A court hearing has been set to begin October 16, 2018 in State of Colorado County of Pueblo District Court.
Prior
board of directors’ litigation
On
August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey
Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services
rendered to the former board members at their behest while members of the board. At present, the matter is scheduled for trial
in October 2018. The $139,000 is included in our accounts payable on the balance sheet.
DFP
litigation
On
October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft.
We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed
a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are
in excess of any counter claims.
GrowCo
– Blue Green litigation
On
January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on
payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is
requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
State
of Colorado litigation
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 to have 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 by March 31, 2018. The Company has been able to empty all the water in the Dam but was not be able to meet the requirements
of the stipulation agreement by March 31, 2018. It anticipates that it will by late 2018. The Company also intends to work with
the Colorado State Engineer to construct a new dam close to the prior dam structure, pending financing. Also, as part of the litigation,
Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. This part
of the litigation awaits a trial setting. The State is requesting the Company to pay $100,000 as a penalty for violating the stipulation
agreement. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.
GrowCo
and GrowCo Partners 1, LLC v. Harding and Morris
On
May 1, 2018, Wayne Harding, our Chief Executive Officer and acting Chief Financial Officer and a member of the Board of Directors,
and Samuel Morris Jr., also a member of the Board of Directors, were notified of a complaint filed with the District Court, City
and County of Denver, Colorado by (a) GrowCo, Inc. or GrowCo and (b) GCP Super Units, LLC, filing derivatively on behalf of GrowCo
Partners 1, LLC or GCP1.
GrowCo
and GCP1 are considered to be our variable interest entities under U.S. generally accepted accounting principles, which means
we are deemed to control them despite not owning a majority of their equity. Because GrowCo and GCP1 are considered to be our
variable interest entities, their financial statements are consolidated with ours.
Messrs.
Harding and Morris serve as the common unit managers of GCP1. The complaint claims that Messrs. Harding and Morris, in serving
as such managers:
|
●
|
failed
to conduct the business affairs of GCP1 in the best interests of GCP1;
|
|
●
|
engaged
in transactions involving conflicts of interest;
|
|
●
|
usurped
business opportunities of GCP1;
|
|
●
|
engaged
in self-dealing and transferred funds and reorganized debt to the detriment of GCP1;
|
|
●
|
failed
to comply with the operating agreement of GCP1;
|
|
●
|
engaged
in unauthorized and improper transactions on behalf of GCP1; and
|
|
●
|
pursued
a scheme to usurp the authority of parties who should be the appropriately appointed
managers of GCP1.
|
The
complaint also asserts, through derivative claims, that, while serving as GCP1 common unit managers, Messrs. Harding and Morris:
|
●
|
breached
their fiduciary duties;
|
|
●
|
received
unjust enrichment;
|
|
●
|
engaged
in fraudulent concealment and civil conspiracy; and
|
|
●
|
failed
to conduct the business affairs of GCP1 in the best interests of GCP1.
|
The
complaint states that the plaintiffs have suffered economic damages, including loss of profits, in an amount to be determined
at the time of trial. Further the complaint is requesting removing Messrs. Harding and Morris from all current positions as managers,
and/or officers and/or board member of plaintiff entities.
Messrs.
Harding and Morris have advised us that they believe that all of the claims made in the complaint are without merit and that they
intend to defend vigorously against these claims.
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
income from discontinued operations presented in the statements of operations consist of the following for the three months ended
March 31, 2018 and March 31, 2017:
|
|
March
31, 2018
|
|
|
March
31, 2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
General and administrative
expenses
|
|
|
-
|
|
|
|
88,000
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
119,000
|
|
Interest
|
|
|
-
|
|
|
|
21,000
|
|
Other (gain
(loss) on disposal of assets and intangibles)
|
|
|
-
|
|
|
|
319,000
|
|
Total Loss
|
|
$
|
-
|
|
|
$
|
547,000
|
|
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 $12,924,000 during the
year ended December 31, 2017 and $2,217,000 for the three months ended March 31, 2018. At March 31, 2018, the Company had
a working capital deficit of $27,000,000 and an accumulated deficit of approximately $99,000,000, respectively. The HCIC
seller carry back debt and the GrowCo notes are in technical default. The $4M GrowCo Note is classified as current due to the
holders’ right to call the note upon 60-days’ notice. GrowCo has received notification of an entity holding $2,115,000
of this debt of its intent to collect the amount of the note, plus back due interest and attorney fees.
These
factors raise doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification
of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe
management’s plans to mitigate.
Since
March 31, 2018 to May 11, 2018 the Company has not collected additional capital. The
Company is in different stages of discussion with parties interested in providing capital.
Additionally,
we continue to reduce our general and administrative and cash required for our operations.
NOTE
10 – RELATED PARTY
There
were no related party transactions during the three months ended March 31, 2018.
NOTE
11 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
March
31, 2018
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
On
May 7, 2018, the Company and Powderhorn modified the Note to allow the pending S-1 registration
statement to be withdrawn and payments to be made in cash at least through August 9,
2018.
|