NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Six Months Ended June 30, 2018 and June 30, 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.
Overview
In
2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of June 30, 2018,
we own 6,508 gross acres. Gross acres owned decreased from 7,376 gross acres at December 31, 2016 due to the sale of 868 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 1,500 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. 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. As of March 31, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000,
or 29.12%. The reported outstanding shares was provided to the Company by GrowCo’s management.
The
Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July
17, 2018 the Company was notified by GrowCo’s management that GrowCo will not provide the requested financial information.
This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under
US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities is no longer
required under US GAAP.
Water
Redevelopment Company
We
formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets
from the rest of our business and to 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, should no longer be consolidated for financial statement
purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended
June 30, 2018, GrowCo and its related entities were consolidated.
Deconsolidation
of GrowCo, Inc.
Even
though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management
has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign
these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1
managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss a work out arrangement whereby
GCP1 will use leasing cash flow to pay the secured note holders. GCP1 management has come to a verbal agreement on a general
structure of the payment to the secured note holders of 50% of lease revenue (after direct costs) to be used
to pay interest and retire the principal of these notes. However, no written agreement is in place. Since Two Rivers’
Management desires to present a conservative representation of its financial information it has determined to set
the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a
contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally,
US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under
this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified
in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a.
The aggregate of all of the following:
1.
The fair value of any consideration received. In Two Rivers case, no consideration was received.
2.
The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary
is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were n retained noncontrolling investments
in GrowCo or its related entities.
3.
The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income
attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount
of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
Entity
|
|
April
1, 2018
|
|
GrowCo
|
|
|
(1,230,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
5,016,000
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
495,000
|
|
Total
|
|
$
|
8,859,000
|
|
b.
The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined
that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This
amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the
removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s
assets.
Investment
in GrowCo Partners 1, LLC (GCP1)
Due
to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted
for under the equity method.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions
to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S.
GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information
not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results
for the three and six months ended June 30, 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
|
|
June
30, 2018
|
|
|
Dec
31, 2017
|
|
TR
Capital
|
|
$
|
20,482,000
|
|
|
$
|
20,482,000
|
|
HCIC
|
|
|
1,386,000
|
|
|
|
1,388,000
|
|
F-1
|
|
|
29,000
|
|
|
|
29,000
|
|
F-2
|
|
|
162,000
|
|
|
|
162,000
|
|
DFP
|
|
|
452,000
|
|
|
|
452,000
|
|
GrowCo
|
|
|
-
|
|
|
|
(850,000
|
)
|
GrowCo
Partners 1, LLC
|
|
|
-
|
|
|
|
3,621,000
|
|
GCP
Super Units, LLC
|
|
|
-
|
|
|
|
5,016,000
|
|
TR
Cap 20150630 Distribution, LLC
|
|
|
-
|
|
|
|
497,000
|
|
TR
Cap 20150930 Distribution, LLC
|
|
|
-
|
|
|
|
460,000
|
|
TR
Cap 20151231 Distribution, LLC
|
|
|
-
|
|
|
|
495,000
|
|
Total
|
|
$
|
22,511,000
|
|
|
$
|
31,752,000
|
|
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.
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.
Since
GrowCo management did not provide its financial information, for the three months ended June 30, 2018, the Company estimated its
share of the GrowCo loss as accounted for under the equity method.
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, 2018
|
|
|
December
31, 2017
|
|
Office
equipment, furniture
|
|
|
5
– 7
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
Computers
|
|
|
3
|
|
|
|
47,000
|
|
|
|
46,000
|
|
Vehicles
|
|
|
5
|
|
|
|
25,000
|
|
|
|
92,000
|
|
Farm
equipment
|
|
|
7
– 10
|
|
|
|
147,000
|
|
|
|
244,000
|
|
Buildings
|
|
|
27.5
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Website
|
|
|
3
|
|
|
|
7,000
|
|
|
|
7,000
|
|
Subtotal
|
|
|
|
|
|
|
248,000
|
|
|
|
411,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(218,000
|
)
|
|
|
(251,000
|
)
|
Net
book value
|
|
|
|
|
|
$
|
30,000
|
|
|
$
|
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.
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 $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
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
Income (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
118,000 RSUs, 2,425,000 options, and 17,536,958 warrants at June 30, 2018 and December 31, 2017, only
includes the 118,000 outstanding RSUs with an exercise price of $-0-/share. The remaining options and warrants have an exercise
price in excess of the Company’s closing price of $0.135/share as of June 30, 2018; therefore these shares have 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.
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 $6,930,000 of impairments on the Company’s
land and water shares. No amortization or depreciation is taken on the water rights.
Gain
on Disposal of Assets
During
the six months ended June 30, 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:
|
|
June
30, 2018
|
|
December
31, 2017
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC
seller carry back
|
|
$
|
6,301,000
|
|
|
$
|
488,000
|
|
|
$
|
-
|
|
|
$
|
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
|
|
|
282,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,000
|
|
|
|
6.8
|
%
|
|
2,579
acres of pasture land in Ellicott Colorado
|
TR
Note to GrowCo
|
|
|
390,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
GrowCo
$4M notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$1.5M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
22.5
|
%
|
|
Various
land and water assets
|
GrowCo
$6M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,855,000
|
|
|
|
22.5
|
%
|
|
|
GrowCo
$7M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,132,000
|
|
|
|
10-22.5
|
%
|
|
|
GrowCo
$2M exchange note
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,520,000
|
|
|
|
10-22.5
|
%
|
|
|
Bridge
loan Harding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,000
|
|
|
|
18
|
%
|
|
None
|
Powderhorn
Note
|
|
|
450,000
|
|
|
|
-
|
|
|
|
(85,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Third
lien on Ellicott land
|
Morning
View LLC
|
|
|
105,000
|
|
|
|
2,000
|
|
|
|
(7,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Unsecured
|
TURV
Long Term NP
|
|
|
271,000
|
|
|
|
32,000
|
|
|
|
(7,000
|
)
|
|
|
275,000
|
|
|
|
12.0
|
%
|
|
Second
lien on Ellicott land
|
WRC
Convertible NP
|
|
|
300,000
|
|
|
|
46,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
12.0
|
%
|
|
Lien
on water supply agreement
|
WRC
Land Notes
|
|
|
400,000
|
|
|
|
10,000
|
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Butte
Valley Land
|
Equipment
loans
|
|
|
67,000
|
|
|
|
2,000
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
5
- 8
|
%
|
|
Equipment
|
OID
Black Mountain
|
|
|
157,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
Unsecured
|
Total
|
|
|
9,413,000
|
|
|
$
|
580,000
|
|
|
$
|
(100,000
|
)
|
|
|
19,107,000
|
|
|
|
|
|
|
|
Less:
note discounts
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
Less:
Current portion net of discount
|
|
|
(8,139,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,419,000
|
)
|
|
|
|
|
|
|
Long
term portion net of discount
|
|
$
|
1,174,000
|
|
|
|
|
|
|
|
|
|
|
$
|
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 which, in
this situation, equals a straight line method.
HCIC
Carry Back Loan
Payments
to all of the HCIC note holders are behind scheduled. For the three months ended June 30, 2018, the Company is in technical default
on $6,301,000 of the HCIC carry back notes due to non-payment of principal. Consequently, the entire amount of the notes
has been classified as current.
GrowCo
$4M Notes Guaranty
During
the ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes
have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse
and associated warehouse. The notes pay 22.5% in annual interest, with interested paid monthly, and are due April 1, 2020. GrowCo
cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each
note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes
are in technical default.
On
January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments
by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint
is requested immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
Even
though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see
above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a
guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned
by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of
$2,115,000 of the notes to discuss a work out arrangement whereby GCP1 will use leasing cash flow to pay the secured note
holders. While GCP1 management has come to a verbal agreement on a general structure of the payment to the Secured Note
holders of 50% of lease revenue (after direct costs) to be used to pay interest and retire the principal of these
notes. However, no written agreement is in place. Since Two Rivers’ Management desires to present a conservative
representation of its financial information it has determined to set the probability of collection against its collateral
at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount
as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Powderhorn
Note
The
Company has decided to pay Powderhorn’s August 2018 payment by issuance of shares and not in cash. The computation of
shares owed is pending.
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 was extended to July 31, 2018. It has been further extended to September
30, 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. Effective April 1, 2018 and for the three months ended June 30,
2018, the Company stopped consolidating GrowCo, the Greenhouse segment.
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, 2018
|
|
|
Six
Months Ended June 30, 2017
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-house
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Green-house
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,859
|
|
|
$
|
24
|
|
|
$
|
1,883
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
(698
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(526
|
)
|
|
|
(1,224
|
)
|
|
|
(433
|
)
|
|
|
-
|
|
|
|
(207
|
)
|
|
|
(185
|
)
|
|
|
(825
|
)
|
Total
Other Income (Expense)
|
|
|
12,014
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(300
|
)
|
|
|
11,714
|
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(1,020
|
)
|
|
|
(47
|
)
|
|
|
(1,098
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
11,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(814
|
)
|
|
|
10,507
|
|
|
|
(464
|
)
|
|
|
-
|
|
|
|
632
|
|
|
|
(208
|
)
|
|
|
(40
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from Operations
|
|
|
11,321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(814
|
)
|
|
|
10,507
|
|
|
|
(464
|
)
|
|
|
-
|
|
|
|
632
|
|
|
|
(208
|
)
|
|
|
(40
|
)
|
Net
(Loss) from Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(1,081
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,081
|
)
|
Preferred
dividends
|
|
|
(985
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(996
|
)
|
|
|
(987
|
)
|
|
|
-
|
|
|
|
(203
|
)
|
|
|
(5
|
)
|
|
|
(1,195
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
(3
|
)
|
|
|
143
|
|
Net
Income (Loss)
|
|
$
|
10,336
|
|
|
$
|
-
|
|
|
$
|
(810
|
)
|
|
$
|
(825
|
)
|
|
$
|
8,701
|
|
|
$
|
(1,451
|
)
|
|
$
|
(1,081
|
)
|
|
$
|
575
|
|
|
$
|
(216
|
)
|
|
$
|
(2,173
|
)
|
Segment
Assets
|
|
$
|
10,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,152
|
|
|
$
|
30,902
|
|
|
$
|
1,362
|
|
|
$
|
-
|
|
|
$
|
11,489
|
|
|
$
|
34,416
|
|
|
$
|
47,267
|
|
NOTE
6 – EQUITY TRANSACTIONS
The
Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of June
30, 2018, was 33,663,192 common shares.
During
the six months ended June 30, 2018, Two Rivers issued the following common stock:
|
●
|
374,250
common stock to Black Mountain for a $50,000 in principal reduction in its note
payable.
|
|
●
|
524,000
common stock issued to Spotfin Funding for financial services. These shares issued
were expensed in the previous year.
|
|
●
|
14,840
issued for a conversion from TR Capital into the Company’s common shares. These
shares issued were expensed in the previous year.
|
During
the six months ended June 30, 2018, Two Rivers recognized $745,000 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.
|
The
Company, the other defendants and the plaintiffs are in discussions to settle this case.
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.
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 in the Colorado Division 2 Water Court 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 sought to have certain
water rights demands by the neighboring water rights holders deemed wasteful. The Company has withdrawn this suit with prejudice,
and the water rights holders have sued for their legal fees.
In
the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s
claims at that time. Under the stipulation agreement, Two Rivers agreed to take the existing dam structure down to the sediment
level by March 31, 2018. Two Rivers has been able to empty all the water in the Dam but was not able to meet the requirements
of the agreement by March 31, 2018 due to lack of capital. On April 3, 2018, the State filed a motion for the issuance of a contempt
of court citation against the Company, its directors, former director John McKowen, and certain other individuals for breach of
the agreement seeking sanctions, imposition of a civil penalty of $100,000 and payment of legal fees. The Company and its directors
are contesting the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive.
Preliminary hearings for the defendants were held on May 10 and June 8, 2018. At the May 10, 2018 hearing it was determined that
the State of Colorado could proceed with its action. At the June 8 hearing, a trial date of December 17, 2018 was set by
the Court.
The
Company intends to continue its efforts to seek funding so that it can comply with the agreement. If successful in obtaining financing,
the Company intends to work with the Colorado State Engineer to take down the existing dam. Once this work is completed, the Company
will seek additional funding to construct a new dam close to the prior dam structure. The Company’s engineering firm estimate
the cost to breach the dam structure to be between $1.8 to $2.2 million.
NOTE
8 – DISCONTINUED OPERATIONS
Dionisio
Farms & Produce
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
DFP loss from discontinued operations presented in the statements of operations consist of the following for the six months ended
June 30, 2018 and June 30, 2017:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost
of goods sold
|
|
|
-
|
|
|
|
-
|
|
General
and administrative expenses
|
|
|
-
|
|
|
|
353,000
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
|
1,000
|
|
Interest
|
|
|
-
|
|
|
|
41,000
|
|
Other
(loss on disposal of assets and intangibles
|
|
|
-
|
|
|
|
686,000
|
|
Total
|
|
$
|
-
|
|
|
$
|
(1,081,000
|
)
|
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.
GrowCo
and related entities
Effective
April 1, 2018, the Company is no longer consolidating the financials of GrowCo and its related entities. The effect of deconsolidation
created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo discontinued operations
of $810,000; broken down as follows:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
Revenues
|
|
$
|
52,000
|
|
|
$
|
-
|
|
General
and administrative expenses
|
|
|
(89,000
|
)
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
(61,000
|
)
|
|
|
-
|
|
Interest
|
|
|
(1,092,000
|
)
|
|
|
-
|
|
Non-controlling
interest
|
|
|
380,000
|
|
|
|
-
|
|
Total
|
|
$
|
(810,000
|
)
|
|
$
|
-
|
|
NOTE
9 – CONTINGENT LIABILITY
Even
though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see
above Note 2 – Principals of Consolidation), under ASC 460-10-05, management has determined that the Company is a guarantor
of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the
Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000
of the notes to discuss a work out arrangement whereby GCP1 will use leasing cash flow to pay these note holders. While
GCP1 management has come to a verbal agreement on a general structure of the payment to GrowCo Note holders whereby 50% of lease
revenue (after direct costs) to be used to pay interest and retire the principal of these note holders. However,
no written agreement is in place. Since Two Rivers’ management desires to present a conservative representation of
its financial information it has determined to set the probability of collection against its collateral at 100% of the
recent appraised value. Therefore, the Company has recorded a contingent liability of $2,359,000 and offset this amount
as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
NOTE
10 – 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 a profit of 8,701,000 for the six months ended June 30, 2018, which is due to a non-cash
gain on the consolidation of GrowCo of $17,323,000. At June 30, 2018, the Company had a working capital deficit of $17,168,000
and an accumulated deficit of approximately $88,500,000, respectively. The HCIC seller carry back debt are in technical default.
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.
For
the six months ended June 30, 2018, we have collected $1,026,000 in additional debt.
In
addition, the Company is in different stages of discussion with parties interested in providing capital.
We
continue to reduce our general and administrative and cash required for our operations.
NOTE
11 – RELATED PARTY
There
were no related party transactions during the six months ended June 30, 2018.
NOTE
12 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
June
30, 2018
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
|
●
|
On
July 23, 2018, a potential strategic partner committed to a $500,000 bridge loan to be
funding over a period beginning July 23, 2018 and completed by August 31, 2018. To date,
$200,000 of this bridge loan has been funded.
|
|
●
|
On
July 19 and August 9, the Company issued a total of 566,775 shares of its common stock
as a payment for investment advice to Spotfin Funding, representing a payment of $65,000.
These shares issued were expensed in the previous year.
|
|
●
|
On
August 1 the Company issued 500,000 shares of its common stock for a $50,000 reduction
of the note owed to Black Mountain Equities.
|