NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Nine Months Ended September 30, 2018 and September 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 September 30,
2018, we own 6,430 gross acres. Gross acres owned decreased from 6,538 gross acres at December 31, 2017 due to the sale of 108
acres.
We
are focused on water assets we have acquired and will potentially 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 our name Two Rivers Water Farming
& Water Company. Our water assets are located in a basin that 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 were 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 an arrangement whereby GCP1
might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions
on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal
of these notes. 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 no 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 nine months ended September 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
|
|
Sept
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 property and equipment:
Asset
Type
|
|
Life
in Years
|
|
|
Sept
30, 2018
|
|
|
Dec
31, 2017
|
|
Office equipment, furniture
|
|
|
5
– 7
|
|
|
$
|
12,000
|
|
|
$
|
12,000
|
|
Computers
|
|
|
3
|
|
|
|
46,000
|
|
|
|
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
|
|
|
|
|
|
|
247,000
|
|
|
|
411,000
|
|
Less:
Accumulated depreciation
|
|
|
|
|
|
|
(222,000
|
)
|
|
|
(251,000
|
)
|
Net book value
|
|
|
|
|
|
$
|
25,000
|
|
|
$
|
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.
Dam Demolition Expense
During the three months ended September
30, 2018 a court date has been set for a hearing of the State of Colorado’s legal action to compel the Company to demolish
Cucharas #5 reservoir. A contingent liability, with an offsetting expense of $1,800,000 has been recognized.
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 2,425,000 options, and 17,536,958 warrants at September 30, 2018 and December 31, 2017, have
an exercise price in excess of the Company’s closing price of $0.23/share as of September 28, 2018; therefore these shares
have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive. If
all convertible debt is converted into the Company’s common shares, there would be an additional 3,630,290 shares issued,
using the Company’s closing price of $0.23/share as of September 28, 2018. Therefore, these additional shares are added
to the basic shares for the nine months ended September 30, 2018.
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 nine months ended September 30, 2018, we sold sub-divided, unimproved lots of land located in El Paso County Colorado and
recognized a gain of $156,000. During the nine months ended September 30, 2018 there was also a $42,000 loss from the sale of
equipment.
NOTE
4 – NOTES PAYABLE
Below
is a summary of the Company’s consolidated long term debt:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
Note
|
|
Principal
Balance
|
|
|
Accrued
Interest
|
|
|
Discount
|
|
|
Principal
Balance
|
|
|
Interest
rate
|
|
|
Security
|
HCIC seller carry back
|
|
$
|
6,301,000
|
|
|
$
|
552,000
|
|
|
$
|
-
|
|
|
$
|
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
|
|
|
238,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
|
338,000
|
|
|
|
-
|
|
|
|
(48,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Third lien on Ellicott land
|
Morning View LLC
|
|
|
105,000
|
|
|
|
4,000
|
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Unsecured
|
TURV Long Term NP
|
|
|
271,000
|
|
|
|
44,000
|
|
|
|
-
|
|
|
|
275,000
|
|
|
|
12.0
|
%
|
|
Second lien on Ellicott land
|
WRC Convertible NP
|
|
|
300,000
|
|
|
|
57,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
12.0
|
%
|
|
Lien on water supply agreement
|
WRC Butte Valley
Land Notes
|
|
|
400,000
|
|
|
|
28,000
|
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
|
|
|
Butte Valley
Land
|
Equipment loans
|
|
|
57,000
|
|
|
|
2,000
|
|
|
|
-
|
|
|
|
122,000
|
|
|
|
5
- 8
|
%
|
|
Equipment
|
OID Black Mountain
|
|
|
107,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
|
Investors Fiduciary
LLC
|
|
|
400,000
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shares of HCIC
|
Total
|
|
|
9,597,000
|
|
|
$
|
699,000
|
|
|
$
|
(54,000
|
)
|
|
|
19,107,000
|
|
|
|
|
|
|
|
Less: note discounts
|
|
|
(54,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
Less: Current portion net of discount
|
|
|
(8,400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,419,000
|
)
|
|
|
|
|
|
|
Long term portion
net of discount
|
|
$
|
1,143,000
|
|
|
|
|
|
|
|
|
|
|
$
|
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 schedule. As of September 30, 2018, the Company is in technical default on $6,301,000
of the HCIC carry back notes due to non-payment of principal and interest. Consequently, the entire amount of the notes has been
classified as current.
GrowCo
$4M Notes Guaranty
During
the period 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
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 an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been
reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to
pay interest and retire the principal of these notes. 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 and September 2018 payments by issuance of 800,000 and 646,154 shares and not in cash. Subsequent to September 30, 2018,
800,000 shares have been issued and the 646,154 shares have yet to be issued.
OID
Black Mountain
During
the nine months ended September 30, 2018, the Company issued 874,250 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. In October
2018, the Company reached an agreement with Black Mountain to fully pay Black Mountain amount due of $138,370 with the issuance
of 900,000 common shares of the Company’s stock.
Investors
Fiduciary LLC
On
July 23, 2018 the Company entered into a convertible promissory note with Investors Fiduciary LLC for a bridge loan up to $500,000.
As of September 30, 2018, $400,000 has been drawn on this note. The note carries interest at 20% per annum and is secured by the
Company’s unencumbered 2,456.5 shares in the Huerfano Cucharas Irrigation Company. The holder has a right to convert principal
and any accrued interest into the Company’s common shares at a rate of $0.14/share. On July 23, 2018, the Company’s
common stock closed at $0.117/share. Therefore, the Company did not record a beneficial conversion feature.
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 nine months ended September
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):
|
|
Nine
Months Ended Sept 30, 2018
|
|
|
Nine
Months Ended Sept 30, 2017
|
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
|
Parent
|
|
|
Farms
|
|
|
Greenhouse
|
|
|
Water
|
|
|
Total
|
|
Revenue
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,865
|
|
|
$
|
40
|
|
|
$
|
2,905
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
(886
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(997
|
)
|
|
|
(1,883
|
)
|
|
|
(571
|
)
|
|
|
-
|
|
|
|
(306
|
)
|
|
|
(667
|
)
|
|
|
(1,544
|
)
|
Total
Other Income (Expense)
|
|
|
11,928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,209
|
)
|
|
|
9,719
|
|
|
|
(41
|
)
|
|
|
-
|
|
|
|
(1,689
|
)
|
|
|
(250
|
)
|
|
|
(1,980
|
)
|
Net
(Loss) from Operations Before Income Taxes
|
|
|
11,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,194
|
)
|
|
|
7,858
|
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
870
|
|
|
|
(877
|
)
|
|
|
(619
|
)
|
Income
Taxes (Expense)/Credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
(Loss) from Operations
|
|
|
11,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,194
|
)
|
|
|
7,858
|
|
|
|
(612
|
)
|
|
|
-
|
|
|
|
870
|
|
|
|
(877
|
)
|
|
|
(619
|
)
|
Net
(Loss) from Discontinued Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
(1,174
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,174
|
)
|
Preferred
dividends
|
|
|
(986
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
(1,002
|
)
|
|
|
(1,480
|
)
|
|
|
-
|
|
|
|
(394
|
)
|
|
|
(6
|
)
|
|
|
(1,880
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
540
|
|
|
|
(2
|
)
|
|
|
538
|
|
Net
(Loss)
|
|
$
|
10,066
|
|
|
$
|
-
|
|
|
$
|
(810
|
)
|
|
$
|
(3,210
|
)
|
|
$
|
6,046
|
|
|
$
|
(2,092
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
1,016
|
|
|
$
|
(885
|
)
|
|
$
|
(3,135
|
)
|
Segment
Assets
|
|
$
|
10,746
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,175
|
|
|
$
|
30,921
|
|
|
$
|
907
|
|
|
$
|
-
|
|
|
$
|
12,309
|
|
|
$
|
34,265
|
|
|
$
|
47,481
|
|
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 September
30, 2018, was 34,847,967 common shares.
During
the nine months ended September 30, 2018, Two Rivers issued the following common stock:
●
|
874,250
common stock to Black Mountain for a $100,000 in principal reduction in its note payable.
|
●
|
1,090,957
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.
|
●
|
118,000
issued for a RSU exercise. The RSU expense was recognized in a previous year.
|
During
the nine months ended September 30, 2018, Two Rivers recognized $1,190,000 in stock based compensation to its employees and directors.
During
the nine months ended September 30, 2018, Two Rivers granted 1,541,380 warrants and recognized $30,000 in warrant expense.
NOTE
7 – LEGAL PROCEEDINGS
Suncanna
Litigation
Since
2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
●
|
On
April 14, 2016 we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division
of the Colorado Department of Revenue. This suspension remains in place until a hearing.
|
●
|
This
caused Suncanna to be in violation of its lease with GCP1. On April 25, 2016, GCP1 terminated Suncanna’s
lease and began an eviction process against Suncanna. Due to the eviction process, during the three months ended
March 31, 2016, we wrote off $743,000 in Lease Revenues – Related Party, wrote off $587,000 in advances to Suncanna,
and did not recognize any Lease Revenues – Related Party.
|
●
|
On
July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate
the greenhouse by September 6, 2016.
|
●
|
On
August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against
GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former
employees, and associates. We believe that the suit has no merit and will have no material impact on our financial
condition.
|
●
|
On
September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and
began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016.
|
●
|
On
October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff
Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse
prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are
appealing this decision.
|
The
Company, the other defendants and the plaintiffs have settled 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 (“RCA”)
for services rendered to the former board members at their behest while members of the board. The $139,000 is included in our
accounts payable on the balance sheet. An agreement has been reached with RCA to pay amounts owed over time.
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 and CEO 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 that was subsequently postponed to October 2019.
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. As of September 30, 2018 we have accrued a liability
and other expense of $1,800,000 for this work.
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 nine months ended
September 30, 2018 and September 30, 2017:
|
|
Sept
30, 2018
|
|
|
Sept
30, 2017
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
General and administrative
expenses
|
|
|
-
|
|
|
|
508,000
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
1,000
|
|
Interest
|
|
|
-
|
|
|
|
41,000
|
|
Other (loss on
disposal of assets and intangibles)
|
|
|
-
|
|
|
|
624,000
|
|
Total
|
|
$
|
-
|
|
|
$
|
(1,174,000
|
)
|
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:
|
|
Sept
30, 2018
|
|
|
Sept
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 an arrangement whereby GCP1 might use leasing cash flow to pay these note holders. No agreement has been reached,
but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest
and retire the principal of these note holders. 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 6,046,000 for the nine months ended September 30, 2018, which is largely due to a non-cash gain on the consolidation
of GrowCo of $12,773,000. Actual cash consumed from our operations during the nine months ended September 30, 2018 was $824,000.
At September 30, 2018, the Company had a working capital deficit of $19,473,000 and an accumulated deficit of approximately
$91,122,000, 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 nine months ended September 30, 2018, we have collected $1,426,000 in additional debt.
In addition, the Company is in different stages
of discussion with parties interested in providing capital. This includes on-going discussions with a strategic partner and
seeking out new debt funding to consolidate our existing debt and provide new capital to expand our water redevelopment and expansion
efforts.
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 nine months ended September 30, 2018.
NOTE
12 – SUBSEQUENT EVENTS
Pursuant
to ASC 855, management has evaluated all events and transactions that occurred from
September
30, 2018
through the date of issuance of these financial statements. During this period, we had the following significant
subsequent events:
●
|
On
October 3, 2018, the Company issued 6,800,000 common restricted shares to two financing entities that could be used for a
loan to the Company, using this issued stock as collateral. The funds will be available on or after April 3, 2019. Funding
will be at the discretion of the Company. If funding does not occur, the shares issued will be returned to the Company.
|
●
|
On
October 29, 2018, the Company issued 900,000 common shares to Black Mountain in exchange for payment in full of the Company’s
$138,370 debt to Black Mountain.
|
●
|
On November 5, 2018, the Company issued 800,000
common shares to Powderhorn in exchange for the September 2018 payment on the note due for a $63,000 due.
|