Attached files
| file | filename |
|---|---|
| EX-31.1 - TURV MCKOWEN 32 EXHIBIT - TWO RIVERS WATER & FARMING Co | exh32mckowen2010q2.htm |
| EX-31.2 - TURV HARDING 31 EXHIBIT - TWO RIVERS WATER & FARMING Co | exh31harding2010q2.htm |
| EX-31.1 - TURV MCKOWEN 31 EXHIBIT - TWO RIVERS WATER & FARMING Co | exh31mckowen2010q2.htm |
| EX-32.2 - TURV HARDING 32 EXHIBIT - TWO RIVERS WATER & FARMING Co | exh32harding2010q2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2010
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number: 000-51139
TWO RIVERS WATER COMPANY
(Exact name of registrant as specified in its charter)
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Colorado
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13-4228144
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State or other jurisdiction of incorporation or organization
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I.R.S. Employer Identification No.
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2000 South Colorado Boulevard, Annex Ste 200, Denver, CO 80222
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(Address of principal executive offices) (Zip Code)
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Registrant’s telephone number, including area code:
(303)222-1000
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes |_| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
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Large accelerated filer
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[___]
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Accelerated filer
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[___]
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Non-accelerated filer
(Do not check if a smaller reporting company)
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[___]
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Smaller reporting company
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[X]
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of July 30, 2010 there were 11,570,583 shares outstanding of the registrant's Common Stock.
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Page
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Item 1
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Financial Statements (Unaudited)
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June 30, 2010 and December 31, 2009
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1
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Consolidated Statements of Operations – Three months and six months ended June 30, 2010 and 2009
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2
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Consolidated Statements of Cash Flows –Six months ended June 30, 2010 and 2009
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3
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Consolidated Statement of Changes in Stockholders’ Equity – June 30, 2010
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5
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6
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Item 2
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32
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Item 3
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Quantitative and Qualitative Disclosures About Market Risk
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40
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Item 4
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Controls and Procedures
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40
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Item 1
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Legal Proceedings
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42
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Item 2
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Unregistered Sales of Equity Securities and Use of Proceeds.
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42
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Item 3
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Defaults Upon Senior Securities – Not Applicable
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43
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Item 4
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Rescinded and Removed
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43
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Item 5
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Other Information – Not Applicable
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43
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Item 6
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Exhibits
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44
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45
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EXPLANATORY NOTE
Two Rivers Water Company, (the “Company”), is filing this Amendment to its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 filed with the Securities and Exchange Commission on August 16, 2010, for the sole purpose of restating the Financial Statements and the Notes to the Financial Statements included in Part I, Item 1 of this filing. An explanation of the changes to the financial statements can be found in Note 2 Summary of Significant Accounting Policies – Restatement.
This Amendment does not reflect events occurring after the Original Filing except as noted above. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and the Company has not otherwise updated disclosures contained therein or herein to reflect events that occurred at a later date.
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
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June 30, 2010
RESTATED
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December 31, 2009
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|||||||
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ASSETS:
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Unaudited
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Audited
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||||||
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Current Assets:
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||||||||
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Cash and cash equivalents
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$ | 207 | $ | 616 | ||||
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Restricted cash
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13 | - | ||||||
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Note receivable - Aegis/Grizzle (Note 4)
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- | 295 | ||||||
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Accrued interest receivable
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- | 4 | ||||||
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Advances and accounts receivable
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58 | 1 | ||||||
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Income taxes receivable (Notes 2, 8)
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427 | 489 | ||||||
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Deposits
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- | 202 | ||||||
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Prepaid expenses
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3 | 16 | ||||||
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Assets held for sale
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- | 134 | ||||||
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Total Current Assets
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708 | 1,757 | ||||||
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Property, equipment and software, net (Note 2)
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185 | 94 | ||||||
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Other Assets
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||||||||
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Mortgages receivable - Net of allowance for bad debts of $139 on June 30, 2010 and December 31, 2009 (Notes 2, 4)
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232 | 232 | ||||||
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Investment in Boston Property, net of impairment of $1,297 and $889 on June 30, 2010 and on December 31, 2009, respectively (Note 3)
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1,934 | 2,073 | ||||||
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Land (Notes 2, 3)
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1,294 | 991 | ||||||
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Water shares (Notes 2, 3)
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24,196 | 2,267 | ||||||
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Options on real estate (Notes 2, 3)
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- | 2,586 | ||||||
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Dam Construction (Note 3)
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436 | 163 | ||||||
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Other real estate owned - net of impairment of $150 and $313 and accumulated depreciation of $33 and $40 on June 30, 2010 and December 31, 2009, respectively (Note 2)
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467 | 1,042 | ||||||
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Farm product
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113 | - | ||||||
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Other assets
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9 | - | ||||||
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Total Other Assets
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28,681 | 9,354 | ||||||
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TOTAL ASSETS
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$ | 29,574 | $ | 11,205 | ||||
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LIABILITIES & STOCKHOLDERS' EQUITY:
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||||||||
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Current Liabilities:
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Accounts payable
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$ | 538 | $ | 281 | ||||
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Short term borrowings (Note 5)
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950 | 950 | ||||||
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Deposits held
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- | 30 | ||||||
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Accrued liabilities
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29 | 5 | ||||||
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Total Current Liabilities
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1,517 | 1,266 | ||||||
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Notes Payable - Long Term (Note 5)
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7,119 | 2,175 | ||||||
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Total Liabilities
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8,636 | 3,441 | ||||||
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Commitments and Contingencies (Notes 1, 2, 3, 4, 5, 7, 8, 9, 10, 12, 13)
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||||||||
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Stockholders' Equity:
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||||||||
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Common stock, $0.001 par value, 100,000,000 shares authorized, 11,484,583 and 9,214,583 shares issued and outstanding at June 30, 2010 and Dec 31, 2009, respectively
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11 | 9 | ||||||
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Additional paid-in capital
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11,943 | 9,200 | ||||||
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Accumulated (deficit)
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(6,228 | ) | (4,120 | ) | ||||
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Total Two Rivers Water Company Shareholders' Equity
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5,726 | 5,089 | ||||||
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Noncontrolling interest in subsidiaries (Note 2)
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15,212 | 2,675 | ||||||
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Total Stockholders' Equity
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20,938 | 7,764 | ||||||
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
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$ | 29,574 | $ | 11,205 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMANY AND SUBSIDIARIES
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30, 2010
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June 30, 2009
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June 30, 2010
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June 30, 2009
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Revenue
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Loan Fees and real estate income
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$ | 2 | $ | - | $ | 2 | $ | - | ||||||||
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Interest revenues
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5 | 10 | 9 | 45 | ||||||||||||
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Member assessments
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35 | - | 53 | - | ||||||||||||
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Total Revenue
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42 | 10 | 64 | 45 | ||||||||||||
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Direct cost of revenue
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- | - | - | - | ||||||||||||
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Gross Profit
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42 | 10 | 64 | 45 | ||||||||||||
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Operating Expenses:
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General and administrative
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957 | 98 | 1,675 | 189 | ||||||||||||
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Depreciation and amortization
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8 | 3 | 13 | 6 | ||||||||||||
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Total operating expenses
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965 | 101 | 1,688 | 195 | ||||||||||||
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(Loss) from operations
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(923 | ) | (91 | ) | (1,624 | ) | (150 | ) | ||||||||
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Other income (expense)
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Gain (loss) on sale of investments
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1 | (133 | ) | 41 | (69 | ) | ||||||||||
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Interest income
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- | 1 | - | 4 | ||||||||||||
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Interest (expense)
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(116 | ) | (8 | ) | (174 | ) | (10 | ) | ||||||||
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Other income (expense)
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(39 | ) | 13 | (88 | ) | - | ||||||||||
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Total other income (expense)
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(154 | ) | (127 | ) | (221 | ) | (75 | ) | ||||||||
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Net (Loss) from continuing operations before taxes
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(1,077 | ) | (218 | ) | (1,845 | ) | (225 | ) | ||||||||
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Income tax benefit (Note 8)
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- | 83 | - | 76 | ||||||||||||
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Net (Loss) from continuing operations
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(1,077 | ) | (135 | ) | (1,845 | ) | (149 | ) | ||||||||
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Discontinued Operations (Note 10)
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||||||||||||||||
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Loss from operations of discontinued real estate and mortgage business (including loss on disposal of real estate of $44 and a $56 gain for six months ending June 30, 2010 and June 30, 2009, respectively)
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(370 | ) | (265 | ) | (536 | ) | (910 | ) | ||||||||
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Income tax benefit
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- | 58 | - | 128 | ||||||||||||
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(Loss) on discontinued operations
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(370 | ) | (207 | ) | (536 | ) | (782 | ) | ||||||||
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Net (Loss)
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(1,447 | ) | (342 | ) | (2,381 | ) | (931 | ) | ||||||||
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Less net loss attributable to the noncontrolling interest (Note 2)
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200 | - | 273 | - | ||||||||||||
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Net (Loss) attributable to Two Rivers Water Company
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$ | (1,247 | ) | $ | (342 | ) | $ | (2,108 | ) | $ | (931 | ) | ||||
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(Loss) Per Share - Basic:
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||||||||||||||||
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(Loss) from continuing operations
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(0.10 | ) | (0.02 | ) | (0.17 | ) | (0.02 | ) | ||||||||
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(Loss) from discontinued operations
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(0.03 | ) | (0.02 | ) | (0.05 | ) | (0.08 | ) | ||||||||
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Total
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(0.13 | ) | (0.04 | ) | (0.22 | ) | (0.10 | ) | ||||||||
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Weighted Average Shares Outstanding:
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||||||||||||||||
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Basic
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11,267 | 8,957 | 10,700 | 8,957 | ||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
(Unaudited)
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For the six months ended June 30,
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||||||||
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2010
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2009
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|||||||
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Cash Flows from Operating Activities:
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||||||||
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Net (Loss) Income
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$ | (2,381 | ) | $ | (931 | ) | ||
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Adjustments to reconcile net income or (loss) to net cash used in operating activities:
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||||||||
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Depreciation (including discontinued operations)
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32 | 27 | ||||||
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(Decrease) in bad debt allowance on note receivables
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- | (478 | ) | |||||
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Bad debt written off from sale of Legendary Investment
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70 | - | ||||||
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Increase in reserves and impairments
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337 | 566 | ||||||
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Recapture of impairments from REOs sold
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(75 | ) | - | |||||
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(Gain) from REOs sold (discontinued operations)
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(17 | ) | (56 | ) | ||||
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(Gain) on sale of investments and assets held
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(40 | ) | 69 | |||||
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Net (Gain) on sale of Legendary Investments
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(12 | ) | - | |||||
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(Increase) in note receivable on Legendary sale
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(9 | ) | - | |||||
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Stock based compensation and warrant extension
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630 | 38 | ||||||
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Noncontrolling interest in net loss
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273 | - | ||||||
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Changes in operating assets and liabilities:
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(Decrease) in deferred revenue
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- | (6 | ) | |||||
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(Increase) in accounts receivable
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(53 | ) | (4 | ) | ||||
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Decrease in prepaid expenses and other assets
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13 | 17 | ||||||
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Decrease in mortgage loans receivable
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- | 986 | ||||||
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(See Supplemental Information below)
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Decrease (increase) in income tax receivable
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62 | (171 | ) | |||||
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(Increase) in deferred tax asset
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- | (184 | ) | |||||
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Decrease in accrued interest and expenses
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- | 8 | ||||||
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Increase (decrease) in accounts payable
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257 | (131 | ) | |||||
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(Decrease) in accrued liabilities and other
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(6 | ) | (94 | ) | ||||
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Net Cash (Used in) Operating Activities
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(919 | ) | (344 | ) | ||||
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Cash Flows from Investing Activities:
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Investments (increased)/decreased
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||||||||
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Boston real estate
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(269 | ) | (199 | ) | ||||
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Marketable securities purchased
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- | (123,702 | ) | |||||
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Proceeds from marketable securities sold
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- | 123,276 | ||||||
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Proceeds from REO properties sold
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498 | 1,196 | ||||||
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Proceeds from asset held for sale
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176 | - | ||||||
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Purchase of property, equipment and software
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(128 | ) | - | |||||
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Proceeds from fixed assets sold
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13 | - | ||||||
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Other assets
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- | (7 | ) | |||||
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Purchase of land, water shares, and options
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(5,939 | ) | - | |||||
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Dam construction
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(273 | ) | - | |||||
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Farm product
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(113 | ) | - | |||||
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Net Cash Provided by/(Used in) Investing Activities
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(6,035 | ) | 564 | |||||
Continued on next page
Continued from previous page
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Cash Flows from Financing Activities:
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|||||||||
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Increase (decrease) in long term borrowings
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4,944
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(250
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) | ||||||
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Private placement - net of placement costs
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1,620
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-
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|||||||
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Retirement of Common Stock
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(6
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) |
(68
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) | |||||
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Net Cash Provided by Financing Activities
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6,558
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(318
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) | ||||||
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Net (Decrease) in Cash & Cash Equivalents
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(396
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) |
(98
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) | |||||
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Beginning Cash & Cash Equivalents
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616
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874
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|||||||
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Ending Cash & Cash Equivalents
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$ |
220
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$ |
776
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Supplemental Disclosure of Cash Flow Information
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Non cash settlement on short term mortgages and transfers
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$ |
-
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$ |
1,256
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|||||
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Non-controlling interest
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$ |
(345)
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$ |
-
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|||||
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Cash paid for Interest
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$ |
78
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$ |
21
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|||||
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Cash paid for Income Taxes
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$ |
-
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$ |
-
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|||||
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Cash received from Income tax refunds
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$ |
61
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$ |
227
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|||||
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Margin debt incrase
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$ |
-
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$ |
484
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|||||
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Common stock issued for land and water share purchase
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$ |
500
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$ |
-
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|||||
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Conversion of note receivable for loan on land
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$ |
295
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$ |
-
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|||||
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Increase in Water Shares due to acquisition costs
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$ |
174
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$ |
-
|
|||||
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Increase in note receivable from sale of Legendary Investment
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$ |
9
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$ |
-
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|||||
The accompanying notes to consolidated financial statements are an integral part of these statements
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
For the Years Ended December 31, 2009 and 2008 and six months ended June 30, 2010 (In thousands)
(Restated) (Unaudited)
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Accumulated
|
||||||||||||||||||||||||||||
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Voting
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Additional
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Other
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Non-
|
|||||||||||||||||||||||||
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Common Stock
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Paid-in
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Comprehensive
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Controlling
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Accumulated
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Stockholders'
|
|||||||||||||||||||||||
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Shares
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Amount
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Capital
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Income
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Interest
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(Deficit)
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Equity
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||||||||||||||||||||||
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Balances, December 31, 2007
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8,924 | $ | 9 | $ | 8,758 | $ | 1,578 | $ | - | $ | (1,377 | ) | $ | 8,968 | ||||||||||||||
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Net Income
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- | - | - | - | - | 182 | 182 | |||||||||||||||||||||
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Options exercised
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100 | - | 5 | - | - | - | 5 | |||||||||||||||||||||
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Change in unrealized gains
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- | - | - | (1,578 | ) | - | - | (1,578 | ) | |||||||||||||||||||
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Stock-based compensation expense
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- | - | 114 | - | - | - | 114 | |||||||||||||||||||||
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Retirement of Stock- open market purchases
|
(5 | ) | - | (4 | ) | - | - | - | (4 | ) | ||||||||||||||||||
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Balances, December 31, 2008
|
9,019 | 9 | 8,873 | - | - | (1,195 | ) | 7,687 | ||||||||||||||||||||
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Net (Loss)
|
- | - | - | - | (175 | ) | (2,925 | ) | (3,100 | ) | ||||||||||||||||||
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Stock-based compensation expense
|
- | - | 118 | - | - | - | 118 | |||||||||||||||||||||
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Retirement of Stock - open market purchases
|
(155 | ) | - | (94 | ) | - | - | - | (94 | ) | ||||||||||||||||||
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Stock purchased through private placement
|
150 | - | 150 | - | - | - | 150 | |||||||||||||||||||||
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Options exercised
|
200 | - | 10 | - | - | - | 10 | |||||||||||||||||||||
|
Recovered BPZ stock
|
- | - | 143 | - | - | - | 143 | |||||||||||||||||||||
|
Non-controlling interest in a subsidiary
|
- | - | - | - | 2,850 | - | 2,850 | |||||||||||||||||||||
|
Balances, December 31, 2009
|
9,214 | 9 | 9,200 | - | 2,675 | (4,120 | ) | 7,764 | ||||||||||||||||||||
|
Net (Loss)
|
- | - | - | - | (273 | ) | (2,108 | ) | (2,381 | ) | ||||||||||||||||||
|
Non-controlling interest in subsidiaries
|
- | - | - | - | (72 | ) | - | (72 | ) | |||||||||||||||||||
|
Stock-based compensation expense
|
- | - | 580 | - | - | - | 580 | |||||||||||||||||||||
|
Warrant extension expense
|
- | - | 50 | - | - | - | 50 | |||||||||||||||||||||
|
Stock issued in exchange for land and water shares
|
500 | - | 499 | - | - | - | 499 | |||||||||||||||||||||
|
Stock purchased through private placement
|
1,776 | 2 | 1,774 | - | - | - | 1,776 | |||||||||||||||||||||
|
Direct cost of private placement
|
- | - | (154 | ) | - | - | - | (154 | ) | |||||||||||||||||||
|
Valuation of Mutual Ditch Company
|
- | - | - | - | 12,882 | - | 12,882 | |||||||||||||||||||||
|
Retirement of Stock - open market purchases
|
(6 | ) | - | (6 | ) | - | - | - | (6 | ) | ||||||||||||||||||
|
Balances, June 30, 2010
|
11,484 | $ | 11 | $ | 11,943 | $ | - | $ | 15,212 | $ | (6,228 | ) | $ | 20,938 | ||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
For the Six Months Ended June 30, 2010 and June 30, 2009
(Restated)
(Unaudited)
NOTE 1 - ORGANIZATION
GENERAL
Two Rivers Water Company (“Two Rivers” or “the Company”) was incorporated in December 2002 in the state of Colorado, as a wholly owned subsidiary of Navidec Inc. ("Old Navidec"). The Company was formerly known as Navidec Financial Services, Inc. until it changed its name on November 19, 2009 to Two Rivers Water Company. The Company’s operations are primarily centered in Colorado.
On August 17, 2009, HCIC Holdings, LLC (“HCIC”), a Colorado limited liability company, was formed to acquire and operate a water business consisting of ownership of water rights, storage of water and distribution of water (the “Water Business”). The Company owns 50% of HCIC, through its 100% owned subsidiary, TRWC, Inc. The other owner of 50% of HCIC is Two Rivers Basin LLC (“TRB”); a private Colorado limited liability company.
On March 17, 2010, the Company formed Two Rivers Farms, LLC (“Farming”) to acquire and operate agriculture land either as a sole operator or in joint venture with other individuals and companies (the “Farming Business”). Two Rivers is Farming’s sole member and owner. Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farms, LLC.
On March 17, 2010, the Company formed Two Rivers Energy, LLC (“Energy”), a Colorado limited liability company, to produce alternative energy on land owned by the Company, or the Company’s subsidiaries. Two Rivers is Energy’s sole member and owner. The Company plans to develop alternative energy equipment and the subsequent production of alternative energy primarily from solar energy which might be operated through a joint venture with one or more other entities which are not yet determined (the “Energy Business”). Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.
On July 13, 2010, the Company formed Two Rivers Water, LLC (“Water” and also included in the “Water Business”), a Colorado limited liability company, to secure additional water rights, rehabilitate water storage structures and to develop one or more special water districts.
In addition, Two Rivers operates the following businesses: (a) property management and residential real estate brokerage in Arizona, and (b) development of a three unit residential condominium in Boston Massachusetts. The Company is in the process of liquidating its real estate and mortgage assets through the sale of residential properties acquired through foreclosure and the sale or receive a payoff of the two remaining mortgages it holds.
On June 30, 2010, the Company sold its 100% interest in Legendary Investment Group, LLC (“Legendary”) to its acting broker, a previous employee of Legendary, for a sales price of $9,000 plus the buyer assuming the office lease.
The Company intends to focus its entire efforts on the development of the Water, Farming and Energy Businesses. Therefore, the Company is winding down and/or disposing of its other businesses. The Company is in the process of completing the purchase of the remaining outstanding shares of Huerfano-Cucharas Irrigation Company; a Colorado Mutual Ditch Company (the “Mutual Ditch Company”) located in Huerfano and Pueblo counties in the State of Colorado and additional land, which would assist in perfecting water rights and provide additional water resources. As of June 30, 2010 HCIC had a 74% ownership in the Mutual Ditch Company.
The Mutual Ditch Company owns a large privately held, on-stream reservoir of 41,200 acre feet capacity with associated direct flow and storage rights and a mutual ditch water distribution system that holds easement rights into the Arkansas River. The Mutual Ditch Company also owns additional, smaller water storage facilities.
The Company’s objective is to develop the Mutual Ditch Company’s water resources and enhance water storage capacity to the fully permitted 41,200 acre feet through a major dam and structure renovation and improvement project. Along with developing water resources, the Company is purchasing farmland, farming the land and intends to supply alternative energy to the Colorado market.
SUBSIDIARIES
Two Rivers is the parent company and owns 100% of TRWC, Inc., Two Rivers Farms LLC, Two Rivers Energy LLC and Two Rivers Water LLC. Two Rivers also owns 50% of HCIC Holdings, LLC. HCIC Holdings LLC owns 74% of the Mutual Ditch Company as of June 30, 2010. Two Rivers owns 98% of Northsight, Inc. Northsight owns 100% of Southie Developments and Legendary Investment Group.
TRWC, INC. (formerly Two Rivers Water Company)
On July 28, 2009, the Company formed Two Rivers Water Company, a Colorado corporation. On November 19, 2009, with shareholder approval, the Company changed its parent name from Navidec Financial Services, Inc. to Two Rivers Water Company. Simultaneously the Company changed the original Two Rivers Water Company’s name to TRWC, Inc. (“TRWC”). The Company owns 100% of TRWC.
HCIC HOLDINGS, LLC
Two Rivers currently operates a water acquisition, development and distribution business in Huerfano County, Colorado through its 50% owned subsidiary HCIC, which at December 31, 2009 had an 18% ownership in the Mutual Ditch Company. As of June 30, 2010, HCIC owned 74% of the Mutual Ditch Company. As of August 2, 2010, HCIC owned 74% of the Mutual Ditch Company and had under contract to purchase another 16% of the Mutual Ditch Company.
On August 17, 2009, Two Rivers, through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture. Under the terms of the joint venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009, the Company had contributed $1,807,000 in HCIC. As of June 30, 2010, the Company has contributed $1,063,000 over its $2,850,000 capital contribution. The capital contribution was eliminated in the consolidation with HCIC.
Further, due to the Company being the sole contributor of operational cash, without which HCIC would be unable to operate, the Company is treating its investment in HCIC as a Variable Interest Entity (“VIE”) and under US GAAP should consolidate HCIC.
In coming to the conclusion to consolidate HCIC, the Company researched the authoritative literature as it pertains to the equity method of accounting and joint ventures (ASC 323.10.15). Other considerations to be examined if there is a VIE relationship which pertains to the Company includes representation on the board of directors; participating in policy-making processes, and the interchange of managerial personnel (ASC 323.10.15-6). Further, accounting standards require valuing TRB’s contribution in HCIC at fair value, which is estimated to be $2,740,000.
Before the formation of HCIC on August 17, 2009, TRB paid $130,000 to 93% of the shareholders of the Mutual Ditch Company for the right to purchase the shares of the Mutual Ditch Company. During the three months ended September 30, 2009, HCIC paid $70,000 to extend the option to purchase land and water shares from shareholders of the Mutual Ditch Company. If the land and water shares are purchased, the option payments will reduce the purchase price. As of June 30, 2010, HCIC owned 74% of the Mutual Ditch Company.
HUERFANO-CUCHARAS IRRIGATION COMPANY
Huerfano-Cucharas Irrigation Company; a Colorado Mutual Ditch Company is located in Huerfano and Pueblo counties in the State of Colorado. The Mutual Ditch Company owns water rights, water storage and distribution systems in Huerfano and Pueblo counties. As of June 30, 2010, HCIC owned 74% and as of August 2, 2010 owned 74% of the Mutual Ditch Company.
TWO RIVERS FARMS, LLC
The Company formed Two Rivers Farms, LLC to reintroduce agriculture activity in Huerfano and Pueblo counties in Colorado. With the planned re-construction of the main reservoir (the Cucharas Reservoir) owned by the Mutual Ditch Company, Farming plans to lease water from the Mutual Ditch Company to begin to produce agriculture crops.
Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farms, LLC.
Farms is currently farming approximately 400 acres of land.
TWO RIVERS WATER, LLC
The Company formed Two Rivers Water, LLC to secure additional water rights, rehabilitate water storage structures and to develop one or more special water districts.
TWO RIVERS ENERGY, LLC
The Company formed Two Rivers Energy, LLC to focus on the production of alternative energy. Except for a bank account balance of $1,000, as of June 30, 2010, there are no assets being held in Energy. Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.
HCIC holds a real estate contract to purchase 1,800 acres that is served by the Mutual Ditch Company.
The Company is in the process of seeking financing and a joint venture partner to develop their energy business.
LEGENDARY INVESTMENT GROUP, LLC – Discontinued Operations (sold June 30, 2010)
Legendary Investment Group, LLC (“Legendary”) is a limited liability company under the laws of the state of Arizona. It was formed in October 2008 and in December 2008 became a 100% owned subsidiary of Northsight. Northsight acquired Legendary based on Northsight’s ability to fund and expand Legendary’s business. There is no formal amount of future funding and expansion and Northsight can withdrawal their funding at any time without material future financial exposure. Legendary’s business is in Arizona and focused on residential investors and property management. Legendary has assisted the Company with the management and selling of Arizona property owned by the Company.
Legendary has expanded its residential property management service to properties in the Phoenix area that are not owned by the Company.
On June 30, 2010, the Company sold its 100% interest in Legendary Investment Group, LLC (“Legendary”) to its acting broker, a previous employee of Legendary, for a sales price of $9,000 plus the buyer assuming the office lease.
NORTHSIGHT, INC. (formerly Navidec Mortgage Holdings, Inc.) – Discontinued Operations
In early 2009 Northsight discontinued its short term bridge lending in an effort to reduce its exposure to credit risk. No new loans have been granted since early 2009. As of June 30, 2010 and December 31, 2009, Two Rivers had $231,000 (net of an allowance for impairment of $139,000) in long term bridge loans outstanding.
SOUTHIE DEVELOPMENTS,LLC – Discontinued Operations
Two Rivers formed a Colorado limited liability company, Southie Developments, LLC, (“Southie”) on January 31, 2008, as its sole and managing member. Southie was organized to develop residential real estate for resale and to own and manage residential real estate acquired via foreclosure of real estate loans owned by Two Rivers. Once a real estate loan defaults and Two Rivers obtains title to the collateral, Two Rivers transfers the property to Southie for development and management. As part of the management and development of the properties transferred to it, Southie honors any existing residential leases and will potentially expend monies for rehabilitation of the property with the option of selling the property in a short time period, usually less than one year. However, if Southie deems the property to be a good longer term investment, they might hold the property for periods longer than 12 months. At June 30, 2010, Southie owned two properties and one development property, as discussed below.
In November 2007, Northsight purchased 56 Thomas Park, South Boston, Massachusetts 02127, a residential property, for $1,200,000 (“Thomas Park Property”). This property was subsequently transferred to Southie. The Thomas Park Property is a 6,000 square feet single family residence that Northsight is converting into three 2,000 square feet individual condominium single family units. Once the sale of all three condominium units are complete, Northsight and Southie intends to cease operations in the Boston area. As of May 19, 2008, Southie acquired a $1,200,000 construction loan with Mt. Washington Cooperative Bank for the development of the Thomas Park Property. The loan is due on October 1, 2010 with monthly interest only payments, at prime plus 2% interest rate and an interest rate floor of 7%. As of December 31, 2009, the balance owed on the loan was $950,000. Previously, this loan was due on November 19, 2009 but was extended to October 1, 2010. As part of the agreement to extend the loan a principal reduction was due and an establishment of a restricted cash account to cover interest payments until June 1, 2010. The restricted cash account was not established until January 12, 2010 and totaled $46,000. As of June 30, 2010, the Company had invested $3,231,000 including the bank construction loan of $950,000. The Thomas Park Property is now listed for sale.
At June 30, 2010, Southie had two vacant lots in Virginia, one residential property in Arizona and one property in Colorado acquired by foreclosure or deed-in-lieu process. At June 30, 2010, the carrying value of these properties was $467,000 (net of $150,000 impairment and $33,000 in accumulated depreciation).
Effective January 1, 2010, Two Rivers transferred 100% of its ownership of Southie to Northsight.
The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) as promulgated in Item 210 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position as of June 30, 2010, results of operations for the three months and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009, as applicable, have been made. The results for these interim periods are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K.
Restatement of Results
Subsequent to the issuance of both the Company's audited financial statements for the year ended December 31, 2009 and its unaudited financial statements for the quarterly periods ended March 31, 2010 and June 30, 2010 and to the issuance of a professional valuation of the Mutual Ditch Company issued October 29, 2010, the Company deemed that it was necessary to restate its financial statements for the quarters ended March 31, 2010 and June 30, 2010 as contained in its Quarterly Reports on Form 10Q, filed May 14, 2010 and August 16, 2010, respectively.
Beginning with the quarter ending September 30, 2009, the Company consolidated the financial results of HCIC. As of December 31, 2009, HCIC owned 18% of the Mutual Ditch Company. During the six months ended June 30, 2010, HCIC purchased additional shares of the Mutual Ditch Company and owned 74% of the Mutual Ditch Company shares. For the quarters ended March 31, 2010 and June 30, 2010, the Company estimated the value of the Mutual Ditch Company to be equal to the valuation of the price paid for shares in the Mutual Ditch Company plus the valuation of the options contributed by TRB. The Company consolidated HCIC and the Mutual Ditch Company based on this valuation, pending a formal appraisal. (See Principles of Consolidation.)
On October 29, 2010, the Company received a valuation of the Mutual Ditch Company. The valuation of the Mutual Ditch Company as of March 2, 2010 is estimated to be $24,196,000. Therefore, the valuation of the asset “Water Shares (HCIC)” along with a reduction of the “Options on real estate” was restated to reflect this new valuation. The corresponding offset increased the valuation of the non-controlling interest to its fair value.
In accordance with ASC 820 Fair Value Measurements and Disclosures, the ASC establishes a framework for measuring fair value, establishes a fair value hierarchy based on inputs used to measure fair value, and expands disclosure about fair value measurements. Adopting this statement has not had an effect on the Company’s financial condition, cash flows, or results of operations.
In accordance with ASC 820, the financial instruments have been categorized, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels, as follows:
Level 1. Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g. U.S. Government securities and active exchange traded equity securities.
Level 2. Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g. certain corporate and municipal bonds and certain preferred stocks). This includes (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3. Inputs that are unobservable. Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instruments (e.g. certain structured securities and privately held investments).
The professional appraisal of the Mutual Ditch Company used Level 2 inputs whereby the water rights were valued using comparable prices in markets that are not active. The infrastructure of the Mutual Ditch Company, including water storage, ditches and diversion points, was valued at replacement cost less physical obsolescence and deterioration. The increase in the value of the asset did not have any effect on the Company’s unaudited statement of operations for the six months ended June 30, 2010.
|
June 30, 2010
|
||||||||||||
|
Restated
|
||||||||||||
|
ASSETS:
|
Unaudited
|
Adjustments
|
Unaudited
|
|||||||||
|
Current Assets:
|
||||||||||||
|
Cash and cash equivalents
|
$ | 207 | 207 | |||||||||
|
Restricted cash
|
13 | 13 | ||||||||||
|
Advances and accounts receivable
|
58 | 58 | ||||||||||
|
Income taxes receivable
|
427 | 427 | ||||||||||
|
Deposits and prepaid expenses
|
3 | 3 | ||||||||||
|
Total Current Assets
|
708 | 708 | ||||||||||
|
Property, equipment and software, net (Note 2)
|
185 | 185 | ||||||||||
|
Other Assets
|
||||||||||||
|
Mortgages receivable - Net of allowance for bad debts
|
232 | 232 | ||||||||||
|
Investment in Boston Property, net of impairment
|
1,934 | 1,934 | ||||||||||
|
Land
|
1,294 | 1,294 | ||||||||||
|
Water shares (HCIC)
|
10,677 | 13,519 | 24,196 | |||||||||
|
Options on real estate
|
637 | (637 | ) | - | ||||||||
|
Dam Construction
|
436 | 436 | ||||||||||
|
Other real estate owned - net of impairment and accumulated depreciation
|
467 | 467 | ||||||||||
|
Farm product
|
113 | 113 | ||||||||||
|
Other assets
|
9 | 9 | ||||||||||
|
Total Other Assets
|
15,799 | 28,681 | ||||||||||
|
TOTAL ASSETS
|
$ | 16,692 | 12,882 | 29,574 | ||||||||
|
LIABILITIES & STOCKHOLDERS' EQUITY:
|
||||||||||||
|
Current Liabilities:
|
||||||||||||
|
Accounts payable
|
$ | 538 | 538 | |||||||||
|
Short term borrowings
|
950 | 950 | ||||||||||
|
Accrued liabilities
|
29 | 29 | ||||||||||
|
Total Current Liabilities
|
1,517 | 1,517 | ||||||||||
|
Notes Payable - Long Term
|
7,119 | 7,119 | ||||||||||
|
Total Liabilities
|
8,636 | 8,636 | ||||||||||
|
Stockholders' Equity:
|
||||||||||||
|
Common stock
|
11 | 11 | ||||||||||
|
Additional paid-in capital
|
11,943 | 11,943 | ||||||||||
|
Accumulated (deficit)
|
(6,228 | ) | (6,228 | ) | ||||||||
|
Total Two Rivers Water Company Shareholders' Equity
|
5,726 | 5,726 | ||||||||||
|
Noncontrolling interest in subsidiaries
|
2,330 | 12,882 | 15,212 | |||||||||
|
Total Stockholders' Equity
|
8,056 | 20,938 | ||||||||||
|
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 16,692 | 12,882 | 29,574 | ||||||||
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Two Rivers and its subsidiaries, TRWC, HCIC, Mutual Ditch Company, Farming, Water, Energy, Legendary, Northsight, and Southie. As of June 30, 2010 and December 31, 2009, Northsight had a negative stockholders’ deficit, therefore, the consolidated financial statements do not include a provision for a noncontrolling interest in a subsidiary for Northsight. All significant inter-company balances and transactions have been eliminated in consolidation.
On August 17, 2009, Two Rivers through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture. Under the terms of the Joint Venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009, the Company had contributed $1,807,000. As of June 30, 2010 the Company has contributed $1,063,000 over its $2,850,000 capital contribution. The capital contribution was eliminated in the consolidation with HCIC.
Further, due to the Company being the sole contributor of operational cash, without which HCIC would be unable to operate, the Company is treating its investment in HCIC as a Variable Interest Entity (VIE) and under US GAAP should consolidate HCIC.
In coming to the conclusion to consolidate HCIC, the Company researched the authoritative literature as it pertains to the equity method of accounting and joint ventures (Section 323.10.15). Other considerations to be examined if there is a VIE relationship which pertains to the Company includes representation on the board of directors; participating in policy-making processes, and the interchange of managerial personnel (Section 323.10.15-6). Further, accounting standards require valuing TRB’s contribution in HCIC at fair value, which, at the time of contribution, was estimated to be $2,850,000.
Before the formation of the HCIC on August 17, 2009, TRB paid $130,000 to 93% of the shareholders of the Mutual Ditch Company for the right to purchase the shares of the Mutual Ditch Company. During the three months ended September 30, 2009, HCIC paid $70,000 to extend the option to purchase land and water shares from shareholders of the Mutual Ditch Company. If the land and water shares are purchased, the option payments will reduce the purchase price. If these options are not exercised by HCIC, then the full option payments of $210,000 will be forfeited by HCIC. As of April 30, 2009, HCIC exercised options for 74% of the shares of the Mutual Ditch Company. The remaining options have expired; although management is attempting to acquire over 90% of the Mutual Ditch Company. As of June 30, 2010, HCIC owned 74% of the Mutual Ditch Company, and has consolidated the Mutual Ditch Company into HCIC.
On March 17, 2010, Two Rivers formed Two Rivers Farms, LLC and Two Rivers Energy, LLC as its wholly-owned subsidiaries. Therefore, 100% of Farming and Energy operations and balance sheets are consolidated into Two Rivers.
On July 13, 2010, Two Rivers formed Two Rivers Water, LLC as its wholly-owned subsidiaries. Therefore, 100% of Water operations and balance sheets are consolidated into Two Rivers.
Non-controlling Interest
Non-controlling interest is recorded for the entities HCIC and the Mutual Ditch Company that are consolidated but are not wholly owned by the Company.
Below is the breakdown of the non-controlling interests’ share of gains and (losses).
|
(in thousands)
|
Six months ending June 30, 2010
|
Year ending December 31, 2009
|
||||||
|
HCIC Holdings, LLC
|
$ | (312 | ) | (175 | ) | |||
|
Mutual Ditch Company
|
39 | - | ||||||
|
Total
|
$ | (273 | ) | $ | (175 | ) | ||
Reclassification
Certain amounts previously reported have been reclassified to conform to current presentation.
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 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.
Concentration of Credit Risk
Financial instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, notes receivable and trade accounts receivable. The Company maintains its cash and investment balances in the form of bank demand deposits, money market accounts, commercial papers and short-term notes with financial institutions that management believes to be of high credit quality. Accounts receivable are typically uncollateralized and are derived from transactions with and from customers primarily located in the United States.
As of June 30, 2010, the Company had no individual bank demand deposit over the FDIC insurance limit of $250,000.
As of June 30, 2010, the Company had $6,000 in cash in a stock brokerage account, and $26,000 in securities represented by 25,000 shares of the Company’s stock, which the Company plans to retire. Stockholders’ equity at June 30, 2010 has been adjusted to reflect outstanding shares as if the 25,000 shares had already been retired.
Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects management's best estimate of amounts that may not be collectible. Allowances, if any, for uncollectible accounts receivable are determined based upon information available and historical experience. As of June 30, 2010 and December 31, 2009, there was an allowance of $139,000 against a long term mortgage balance of $371,000.
No revenues to unaffiliated customers represented 10% or more of the Company’s revenue for the year ended December 31, 2009 and for the six months ended June 30, 2010.
Notes Receivable
The Company carries its notes receivable at cost or loan balance, subject to the valuation procedures described below. The book value of these financial instruments is representative of their fair values. As of June 30, 2010 and December 31, 2009 the Company had a total of $232,000 invested in mortgages receivable, net of an allowance for bad debt of $139,000.
Interest is accrued monthly on notes receivable as earned and is no longer accrued if the loan becomes more than 90 days past due. The Company provides a valuation for certain loans that are delinquent. The valuation account is netted against notes receivable. As of June 30, 2010, no interest was being accrued on the two remaining loans, since one loan is in default and under legal action and the other mortgage note is current with no accrued interest due.
Investments
Investments in publicly traded equity securities over which Two Rivers does not exercise significant influence are recorded at market value in accordance with ASC 320 "Investments - Debt and Equity Securities," which requires that all applicable investments be classified as trading securities, available for sale securities or held-to-maturity securities. Comprehensive income includes net income or loss and changes in equity from the market price variations in stock and warrants held by the Company.
Investments in non-publicly traded equity securities or non-marketable equity securities are stated at the lower of cost or estimated realizable value.
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets acquired through foreclosure, acceptance of a deed in lieu of foreclosure or otherwise acquired from the debtor in lieu of repayment of the debt. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Revenues, expenses and subsequent adjustments to fair value less estimated costs to sell are classified as expenses for other real estate owned. Depreciation is taken on property held and rented or with intent to rent. Depreciation on residential real estate is computed straight-line over 27.5 years.
Land is carried at cost and is not depreciated.
Intangibles
Intangibles with an indefinite life. As of June 30, 2010 the estimated fair value of the intangible asset with an indefinite life is $637,000, consisting of the purchase price of water rights acquired through the Company’s purchase of stock in the Mutual Ditch Company less options that have been exercised to purchase stock in the Mutual Ditch Company. Once the options are exercised, the value of the options are transferred to the cost of the water shares. As of June 30, 2010, the value of the water shares, represented by stock in the Mutual Ditch Company is $10,677,000.
The water shares 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. Once per quarter, Management will assess the value of the water rights held, and in their opinion, if the rights have become impaired, Management will establish an allowance against the water rights.
Impairments
The market values of our assets are assessed quarterly by Management. If the current market value is less than the net carrying value of the assets, an impairment charge is taken. Subsequently, if market value recovers and the asset is held for sale, the impairment taken is recaptured, up to the amount of the accumulated impairment for each asset. If the asset is held for long term, and the market value recovers, no recapture of impairment will be made.
|
Part 1—Real estate owned at end of period (in thousands)
|
Part 2—Rental income (in thousands)
|
||||||||
|
Column A—List classification of property as indicated below
|
Column B—Amount of encumbrances
|
Column C—Initial cost to company
|
Column D—Cost of improvements, etc.
|
Column E—Amount at which carried at close of period
|
Column F—Reserve for depreciation and impairments
|
Column G—Rents due and accrued at end of period
|
Column H—Total rental income applicable to period
|
Column I—Expended for interest, taxes, repairs and expenses
|
Column J—Net income applicable to period
|
|
Farms
|
|||||||||
|
Residential
|
|||||||||
|
Arizona
|
113
|
3
|
115
|
50
|
0
|
10
|
4
|
6
|
|
|
Colorado
|
407
|
5
|
412
|
46
|
0
|
26
|
16
|
10
|
|
|
Massachusetts
|
950
|
1,200
|
2,031
|
3,231
|
1,297
|
0
|
0
|
0
|
0
|
|
Apartments and business
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Unimproved
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
VA
|
0
|
123
|
0
|
123
|
87
|
0
|
0
|
1
|
-1
|
|
CO
|
600
|
1,324
|
0
|
1,324
|
1
|
-1
|
|||
|
Total
|
1,550
|
3,167
|
2,038
|
5,205
|
1,480
|
0
|
37
|
22
|
15
|
|
Rent from properties sold during period
|
|||||||||
|
AZ
|
1
|
0
|
0
|
||||||
|
Total
|
1,550
|
3,167
|
2,038
|
5,205
|
1,480
|
0
|
38
|
22
|
15
|
|
Real Estate Detail
(in thousands)
|
Boston Property
|
Other Real Estate Owned
|
Total
|
|||||||||
|
Beginning Balance:
|
$ | 2,146 | $ | 1,867 | $ | 4,013 | ||||||
|
Additions during the period:
|
||||||||||||
|
Acquisitions through foreclosure
|
- | |||||||||||
|
Other acquisitions
|
- | |||||||||||
|
Improvements, etc.
|
129 | 7 | 136 | |||||||||
|
Other (describe) – impairment reclassification
|
- | |||||||||||
|
Deductions during the period:
|
- | |||||||||||
|
Cost of real estate sold
|
(64 | ) | (64 | ) | ||||||||
|
Impairments
|
(341 | ) | (16 | ) | (357 | ) | ||||||
|
Other (describe) - depreciation
|
(3 | ) | (3 | ) | ||||||||
|
Ending Balance, June 30, 2010
|
$ | 1,934 | $ | 1,791 | $ | 3,725 | ||||||
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to seven years. Leasehold improvements are amortized over the remaining term of the applicable leases or their useful lives, whichever is shorter. 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, 2010
|
December 31, 2009
|
|||||||||
|
Office equipment & Furniture
|
5 – 7 | $ | 86,000 | $ | 86,000 | |||||||
|
Computers
|
3 | 58,000 | 52,000 | |||||||||
|
Vehicles
|
5 | 51,000 | - | |||||||||
|
Farm equipment
|
7 | 47,000 | - | |||||||||
|
Mobile office
|
10 | 10,000 | - | |||||||||
|
Irrigation system
|
10 | 15,000 | - | |||||||||
|
Website
|
3 | 2,000 | 2,000 | |||||||||
|
Subtotal
|
269,000 | 140,000 | ||||||||||
|
Less Accumulated Depreciation
|
84,000 | 46,000 | ||||||||||
|
Net Book Value
|
$ | 185,000 | $ | 94,000 | ||||||||
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, trade receivables and payables approximated their fair value because of their short-term nature. Investments in debt securities are recorded at their amortized cost, which approximates fair value because of their short-term maturity. Investments in marketable equity securities are recorded at fair value based upon quoted market prices. Investments in non-marketable equity securities are based upon recent sales of similar securities by the investees and approximated their carrying value. The Company’s borrowings approximate their carrying amounts based upon interest rates currently available to the Company.
Revenue Recognition
Mortgage Revenues - When active in the residential mortgage loan business, the Company primarily recognized its operating revenue through its subsidiary, Northsight, Inc., by charging origination fees from borrowers and earning interest and penalty fees on outstanding loan balances. Northsight recognizes fee and interest income on bridge, asset and conventional mortgage loans after mortgage loan transactions close.
Until early 2009, when the Company ceased doing mortgage loans, Northsight acted as the mortgage broker and Two Rivers acted as the mortgage banker. Northsight recognizes the origination and associated fees in placing a loan when the loan is closed. However, since the statements are consolidated and Two Rivers is the mortgage banker, under ASC 310, Two Rivers, and the consolidated financial statements of Two Rivers, defers the revenue from the origination and associated fees over the expected life of the loan, which is usually 90 days.
During the year ended December 31, 2009, the Company recognized income totaling $11,000 from origination fees. During the six months ended June 30, 2010, the Company did not recognize income from mortgage activity.
Interest Revenues - Revenues from interest are recorded at the time they are earned, thus the revenues shown are for interest actually received and the accruals for that which is due to the Company except for delinquent accruals over 90 days as discussed under notes receivable above. Interest continues to accrue until a foreclosure process begins. At that point, no additional interest is accrued for book purposes. Interest revenues for the six months ended June 30, 2010 and the year ended December 31, 2009 were $9,000 and $45,000, respectively and exclude accruals for delinquent notes receivable over 90 days. Two Rivers accrues interest and penalty interest income at the end of each quarter.
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 statement, 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.
In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 which was issued to express the understanding that the use of a “simplified” method, as discussed in SAB 107 in developing an estimate of expected term of “plain vanilla” share options in accordance with ASC 718 would be acceptable beyond December 31, 2007. The Company adopted this standard beginning January 2008.
Income Taxes
Provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period of enactment.
Net Income (Loss) per Share
Basic net income per share is computed by dividing net income 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 3,631,510 options and 2,815,000 warrants at December 31, 2009, has not been included in the determination of diluted earnings per share since, under ASC 260, they would be anti-dilutive. As of June 30, 2010, the Company had converted 1,905,948 options to restrictive stock units (“RSU”). The conversion and the remaining options and warrants as of June 30, 2010 have not been included in the determination of diluted earnings per share since they would be anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income or loss and changes in equity from the market price variations in securities held by the Company.
Recently issued Accounting Pronouncements
On December 23, 2009, the Financial Accounting Standards Board (“FASB”) issued ASU 2009-16 to amend U.S. GAAP to incorporate the guidance from ASC 860, Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140. ASU 2009-16 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 is effective for the Company’s fiscal year beginning January 1, 2010. The Company is currently evaluating the impact of the future adoption of Update 2009-16.
On December 23, 2009, the FASB issued ASU 2009-17 to amend U.S. GAAP to incorporate the guidance from ASC 810, Amendments to FASB Interpretation No. 46R. ASC 810 is a revision to FASB Interpretation No. 46R, Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The objective of ASC 810 is to amend certain requirements of FIN 46R, to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements. ASU 2009-17 is effective for the Company’s fiscal year beginning January 1, 2010. The Company has adopted this guidance in accounting for its 50% ownership in HCIC for the year ended December 31, 2009 and for future periods.
In July 2010, FASB issued Proposed Accounting Standard Update (Topic 450) – Disclosure of Certain Loss Contingencies. This amendment would lower the current disclosure threshold and broaden the current disclosure requirements to provide adequate and timely information to assist users in assessing the likelihood, potential magnitude, and potential timing (if known) of future cash outflows associated with loss contingencies. The new guidance would be effective for fiscal years ending after December 15, 2010, and interim and annual periods in subsequent fiscal years. The Company is currently reviewing the proposed update to determine, what, if any, effect it would have on the Company’s financial statements.
There were various other accounting standards and interpretations issued in 2010 and 2009, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.
NOTE 3 – INVESTMENTS
In December 2007, Northsight purchased a three-unit property in Boston, Massachusetts, known as Thomas Park. The objective is to rehabilitate the property and then sell it. During the quarter ending June 30, 2008, this property was transferred to Southie. As of June 30, 2010, the Company and subsidiaries had invested $3,231,000 in the property. Part of this investment is funded by a $1,200,000 line of credit from Mt. Washington Cooperative Bank, of which $950,000 was payable on this line as of December 30, 2009 and June 30, 2010. The Company continually performs an analysis of the fair market value of the Thomas Park and if the market price is reduced an allowance/impairment is recorded in the current reporting period. For the six months ending June 30, 2010, the Company recognized an additional impairment of $408,000.
The Company also has acquired real estate through foreclosure or deed in lieu of foreclosure from its activity in granting short term mortgage financing. At June 30, 2010, the valuation of these real estate owned properties is $650,000 less an impairment allowance of $150,000 and accumulated depreciation on the rental properties of $33,000, for a net balance of $467,000.
Land and water shares
Upon purchasing water shares and land, the value is recorded at the purchase price. Management evaluates the carrying value, and if the carrying value is in excess of fair market, will establish an impairment allowance to reflect current fair market value. Currently, there are no impairments on the land and water shares. No amortization or depreciation is taken on the water shares and land, respectively.
Options on real estate
Under the terms of the HCIC joint venture, the non-related party owning 50% of HCIC, TRB, contributed options on purchasing the Mutual Ditch Company along with purchase agreements for acquiring land. TRB also contributed cash being held in escrow or that had been paid to owners of the shares of the Mutual Ditch Company. The Company initially valued TRB’s contribution to HCIC at $2,850,000 and as of June 30, 2010, the value was $637,000 due to transferring the value of options exercised to the purchase price of the water shares.
Dam construction
The Company has commenced engineering for the reconstruction of the dam owned by the Mutual Ditch Company. These costs are capitalized, added to the cost of the dam, and not amortized or depreciated until the dam reconstruction is completed in accordance with ASC 360 and 835.
NOTE 4 – NOTES RECEIVABLE
Notes Receivable – General
During the year ended December 31, 2007, the Company entered a transaction with a former officer of the Company, Mr. Robert Grizzle. In exchange for Mr. Grizzle’s shares in the Company, on May 3, 2007, Mr. Grizzle executed a note payable to the Company in the amount of $450,000. The note carried an 8% interest rate and was collateralized by 1,000,000 Aegis USA common shares, 1,500,000 Aegis USA preferred shares, 220,000 shares of the Company’s common stock and 200,000 options to purchase shares of the Company’s common stock at $0.05 per share held by Mr. Grizzle. The note was a limited recourse note whereby Mr. Grizzle was personally responsible for one half the original principal and interest. The balance owed was collateralized by Mr. Grizzle’s Aegis common and preferred shares and the Company’s common stock. Further, the note provided that at the earlier of one year from the date that the common stock of the Company is publicly traded and his shares are registered for resale under an effective registration statement filed by the Company or December 31, 2009. On September 30, 2007, Mr. Grizzle resigned as the Chief Operating Officer and the Chief Financial Officer of the Company. On October 17, 2008, the Company filed with the SEC an S-8 registration statement registering Mr. Grizzle’s shares.
During 2009, Mr. Grizzle paid $155,000 against principal plus all accrued interest through November 24, 2009. During the six months ended June 30, 2010, in order for the Company to receive a $215,000 loan from a private party, the Company’s Board authorized the assignment of the Company’s collateral in the Grizzle note to the lender. Further, the Board authorized the full release of the note receivable from Grizzle. The Company recognized the fair value of the note receivable released as an additional cost of land and water shares for the six months ending June 30, 2010.
Mortgages Receivable
In July 2007, Northsight began making short term loans to purchasers of residential properties who purchase their property as part of or after the repossession in a foreclosure proceeding. As of December 31, 2008, Two Rivers had $2,197,000 in such loans (net of allowance of $476,000 and unearned income of $6,000). The loans are made primarily to good credit borrowers and are collateralized by a first mortgage on the purchased properties. The average numbers of days outstanding for the loans are less than 90 days, and the primary takeout on the loans is long term financing through secondary sources such as the Federal National Mortgage Association.
In June 2008, the Company transferred the ownership of the short term loans from Northsight, Inc. to the Company. Due to this transfer, the Company funds and owns the loans. There is no longer an intercompany transfer of funds for mortgage loans. As of June 30, 2010 and December 31, 2009, Two Rivers had $232,000 (net of allowance of $139,000) in such loans. As of June 30, 2010, $253,000 represented by one loan, was past 90 days due.
Summary of Receivables
|
Note From
|
Due
|
Principal Amount
|
3/31/10 Balance
|
Annual Interest rate
|
Accrued Interest
|
Collateral
|
|||||||||
|
Short term home mortgages
|
Various and on-going
|
$ | 371,000 | $ | 371,000 |
9.95% to 14%
|
$ | - |
First mortgage
|
||||||
|
Less: Impairments
|
(139,000 | ) | |||||||||||||
|
Net Balance
|
$ | 232,000 | |||||||||||||
NOTE 5 – NOTES PAYABLE
In May 2008, Northsight arranged for a construction line of credit for $1,200,000, due November 2009. Proceeds from this line were used strictly for the renovation of the Thomas Park property in Boston with the intent to resale. As of June 30, 2010, the balance outstanding was $950,000. (See also Note 3.) Since the loan inception, the Company has capitalized $54,000 in interest costs during the construction stage and has expensed $111,000 in interest. This construction line was due November 19, 2009 with interest only payments at prime +2%, with a floor at 7%. The note was extended to June 1, 2010 and subsequently extended again to October 1, 2010 with the same interest rate. For the extension, the bank required cash to be set aside to cover interest payment through June 1, 2010. This restricted cash account was established January 2010 with a balance of $46,000. As of June 30, 2010, the restricted cash balance was $13,000. The line contains general covenants which management believes are in full compliance. This note is collateralized by a first security interest in Thomas Park and the personal signature of John McKowen, CEO.
Beginning on September 17, 2009, HCIC began acquiring shares in the Mutual Ditch Company and related land from a Mutual Ditch Company shareholder. As part of these acquisitions, many sellers took back notes payable by HCIC to the seller. As of December 31, 2009 these loans totaled $2,175,000. As of June 30, 2010 these loans totaled $7,119,000. The notes carry interest at 6% per annum, interest payable monthly, the principal due September 1, 2012 through March 31, 2013, and are collateralized by the Mutual Ditch Company shares and land.
Of the $7,119,000 in seller carry back notes, $864,000 provides the holders the right to convert some or all of the amounts owing into the Company’s stock at $1/share. The holder can convert anytime until the note is paid. In the future, if the market value of the Company’s stock is in excess of $1.00/share, there will be an additional expense recognized due to the conversion feature. These notes are due March 31, 2013 with 6% annual interest, with the interest paid monthly.
NOTE 6 – INFORMATION ON BUSINESS SEGMENTS
We organize our business segments based on the nature of the products and services offered. We primarily focus on the Water Business with Two Rivers Water Company as the parent company and TRWC and HCIC Holdings JV as subsidiaries. Two Rivers Water Company also holds our legacy assets that include the mortgage notes receivable, the property acquired through foreclosure or deed in lieu of foreclosure on previous mortgage notes held by the Company. Other existing and prior real estate activity is held in Northsight and Northsight’s subsidiaries, Southie and Legendary. Southie was a wholly owned subsidiary of Two Rivers until the Company’s board approved the transfer of Southie as a 100% owned subsidiary of Northsight effective January 1, 2010.
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 Two Rivers Water Company.
Operating results for each of the segments of the Company are as follows (in thousands):
|
For the six months ended June 30, 2010
|
||||||||||||||||||||||||||||||||||||
|
(In thousands)
|
||||||||||||||||||||||||||||||||||||
|
Two Rivers Water Co.
|
Northsight, Inc.
|
Southie, LLC
|
Legendary Investment Group, LLC
|
TRWC
|
HCIC Holdings JV
|
Two Rivers Farms
|
Two Rivers Energy
|
Mutual Ditch Company
|
||||||||||||||||||||||||||||
|
Revenue
|
||||||||||||||||||||||||||||||||||||
|
Loan fees, interest and other
|
$ | 9 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
|
Assessments
|
- | - | - | - | - | - | - | - | 463 | |||||||||||||||||||||||||||
|
Other & misc.
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Less: Cost of Services
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Gross Profit
|
9 | - | - | - | - | - | - | - | 463 | |||||||||||||||||||||||||||
|
Total Operating Expenses
|
1,266 | - | - | - | 29 | 453 | 23 | 15 | 312 | |||||||||||||||||||||||||||
|
Total Other Income/(Expense)
|
(48 | ) | - | - | - | - | (173 | ) | 1 | - | - | |||||||||||||||||||||||||
|
Net (Loss) Income from continuing operations before income taxes
|
(1,305 | ) | - | - | - | (29 | ) | (626 | ) | (22 | ) | (15 | ) | 151 | ||||||||||||||||||||||
|
Income Taxes (Expense)/Credit
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Net Income (Loss) from continuing operations
|
(1,305 | ) | - | - | - | (29 | ) | (626 | ) | (22 | ) | (15 | ) | 151 | ||||||||||||||||||||||
|
Discontinued operations:
|
||||||||||||||||||||||||||||||||||||
|
(Loss) gain from operations of discontinued real estate and mortgage business
|
- | (67 | ) | (528 | ) | 59 | - | - | - | - | - | |||||||||||||||||||||||||
|
Income tax benefit
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Loss on discontinued operations
|
- | (67 | ) | (528 | ) | 59 | - | - | - | - | - | |||||||||||||||||||||||||
|
Non-controlling interest
|
313 | - | - | (39 | ) | |||||||||||||||||||||||||||||||
|
Net (Loss) Income
|
$ | (1,305 | ) | (67 | ) | (528 | ) | 59 | (29 | ) | (313 | ) | (22 | ) | (15 | ) | 112 | |||||||||||||||||||
|
Segment assets
|
$ | 827 | 113 | 2,383 | - | 5 | 12,624 | 208 | 1 | 531 | ||||||||||||||||||||||||||
|
For the six months ended June 30, 2009
|
||||||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Two Rivers Water Co
|
Northsight, Inc.
|
Southie, LLC
|
Legendary Investment Group, LLC
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Loan fees, interest and other
|
$ | 45 | - | - | - | |||||||||||
|
Assessments
|
- | - | - | - | ||||||||||||
|
Other & misc.
|
- | - | - | - | ||||||||||||
|
Less: Cost of Services
|
- | - | - | - | ||||||||||||
|
Gross Profit
|
45 | - | - | - | ||||||||||||
|
Total Operating Expenses
|
195 | - | - | - | ||||||||||||
|
Total Other Income/(Expense)
|
(74 | ) | - | - | - | |||||||||||
|
Net (Loss) Income from continuing operations before income taxes
|
(224 | ) | - | - | - | |||||||||||
|
Income Taxes (Expense)/Credit
|
75 | - | - | - | ||||||||||||
|
Net Income (Loss) from continuing operations
|
(149 | ) | - | - | - | |||||||||||
|
Discontinued operations:
|
||||||||||||||||
|
(Loss) gain from operations of discontinued real estate and mortgage business
|
- | (264 | ) | 617 | ) | (28 | ) | |||||||||
|
Income tax benefit
|
- | 69 | 48 | 10 | ||||||||||||
|
Loss on discontinued operations
|
- | (195 | ) | (569 | ) | (18 | ) | |||||||||
|
Non-controlling interest
|
- | - | - | - | ||||||||||||
|
Net (Loss) Income
|
$ | (149 | ) | (195 | ) | (569 | ) | (18 | ) | |||||||
|
Segment assets
|
$ | 2,233 | 148 | 5,716 | 24 | |||||||||||
NOTE 7 - EQUITY TRANSACTIONS
Common Stock
During the year ended December 31, 2009, the Company issued 150,000 shares at $1.00 per share through a private placement and 200,000 shares through the exercise of 200,000 options at $0.05 per share.
During the year ended December 31, 2009, the Company recognized stock-based compensation expense of $118,000, recovered BPZ stock valued at $143,000 and purchased 154,474 shares of the Company’s stock on the open market for $93,000. These shares were retired.
During the six months ended June 30, 2010 the Company’s Board authorized a private placement of up to 5,000,000 shares at $1.00 per share to accredited investors. As of June 30, 2010, the Company had accepted subscriptions representing 1,776,000 shares for gross proceeds of $1,776,000.
During the six months ended June 30, 2010, the Company purchased land and water shares in the Mutual Ditch Company with cash and the issuance of 500,000 shares valued at $1.00 per share.
Stock Options and Restrictive Stock Units (RSUs)
The Company has a Stock Incentive Plan (the "Incentive Plan"), that allows the Company to grant incentive stock options and/or purchase rights (collectively "Rights") to officers, employees, former employees and consultants of the Company and its subsidiaries. The board has given the ability to grant Rights to the CEO.
A summary of the Two Rivers option plan is as follows:
|
Shares
|
Weighted Average
Exercise Price
|
|||||||
|
Outstanding, January 1, 2009
|
3,941,510 | $ | 1.33 | |||||
|
Granted
|
- | - | ||||||
|
Cancelled
|
(110,000 | ) | $ | 2.00 | ||||
|
Expired
|
- | - | ||||||
|
Exercised
|
(200,000 | ) | $ | 0.05 | ||||
|
Outstanding, January 1, 2010
|
3,631,510 | $ | 1.38 | |||||
|
Granted
|
- | - | ||||||
|
Cancelled
|
(1,905,948 | ) | $ | 1.41 | ||||
|
Expired
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Outstanding, June 30, 2010
|
1,725,562 | $ | 1.36 | |||||
|
Options Exercisable , June 30, 2010
|
1,725,562 | $ | 1.36 | |||||
A summary of the Northsight option plan is as follows:
|
Shares
|
Weighted Average
Exercise Price
|
|||||||
|
Outstanding, January 1, 2009
|
582,777 | $ | 0.50 | |||||
|
Granted
|
- | - | ||||||
|
Cancelled
|
(562,777 | ) | $ | 0.50 | ||||
|
Expired
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Outstanding, January 1, 2010
|
20,000 | $ | 0.50 | |||||
|
Granted
|
200,000 | $ | 0.50 | |||||
|
Cancelled
|
- | - | ||||||
|
Expired
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Outstanding, June 30, 2010
|
220,000 | $ | 0.50 | |||||
|
Options Exercisable , June 30, 2010
|
206,667 | $ | 0.50 | |||||
During the six months ended June 30, 2010, the Northsight issued 200,000 of its stock options to the purchaser of Legendary. Using the Black-Scholes model of fair value, the total expense to recognize was less than $1,000 and therefore no expense was recognized.
If all of the Northsight options outstanding at June 30, 2010 were exercised, the impact on the minority interest would be immaterial.
During the six months ended June 30, 2010, the Company converted 1,905,948 of its stock options to RSUs. Under ASC 718, a computation was made to perform a fair value of the options and the fair value of the RSUs. Further, during the six months ended June 30, 2010, an additional 2,200,000 RSUs were granted to the Company’s key employees. The expense recognized for the six months ended June 30, 2010 is $580,000. The remaining unamortized amount is $3,729,000.
The Black-Scholes model of fair value was used using the following variables:
|
Expected stock price volatility
|
35%
|
|
Risk-free interest rate
|
2.64%
|
|
Expected option life (years)
|
3.3 to 5.2
|
|
Expected annual dividend yield
|
0%
|
In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 which was issued to express the understanding that the use of a “simplified” method, as discussed in SAB 107 in developing an estimate of expected term of “plain vanilla” share options in accordance with ASC 718 would be acceptable beyond December 31, 2007. The Company adopted this standard beginning January 2008, and it did not have a material impact on the Company’s consolidated financial statements.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the table below. Because this option valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed above. The Company utilizes historical volatility of other entities in a similar line of business for a period commensurate with the contractual term of the underlying financial instruments and used weekly intervals for price observations. The Company will continue to consider the volatilities of those entities unless circumstances change such that the identified entities are no longer similar to the Company or until there is sufficient information available to utilize the Company’s own stock volatility. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
Warrants
At the Company’s Board meeting held on February 26, 2010, the Board authorized to extend its existing warrants from a May and July, 2010 expiration date to an expiration date of December 31, 2010.
The following warrants to purchase common stock are outstanding:
|
Number of common
shares covered by warrants
|
Exercise Price
|
Expiration Date
|
|||||
| 1,332,500 | $ | 4.00 |
December 31, 2010
|
||||
| 1,332,500 | 2.00 |
December 31, 2010
|
|||||
| 150,000 | 1.00 |
December 31, 2010
|
|||||
| 2,815,000 | |||||||
Due to the extension of the warrant expiration date, a new fair value calculation was performed using the Black-Scholes method using the following variables:
|
Expected stock price volatility
|
35%
|
|
Risk-free interest rate
|
2.64%
|
|
Expected option life (years)
|
3.3 to 5.2
|
|
Expected annual dividend yield
|
0%
|
Based on this calculation, an expense of $50,000 was recognized for the six months ended June 30, 2010.
NOTE 8 – INCOME TAXES
At December 31, 2009, the Company estimated a total 2009 income tax benefit and related expected refund of $489,000.
During the six months ended June 30, 2010, the Company evaluated its potential tax benefit from the loss recognized for this period. The tax benefit is as follows:
Statutory Rate Reconciliation
|
Federal Rate
|
34.00%
|
|
State Rate
|
4.63%
|
|
Federal benefit of State Rate
|
(1.57)%
|
|
Net Effective Rate
|
37.06%
|
Tax asset recognition (in thousands):
|
Loss reported on financials before taxes
|
$ | (2,108 | ) | |
|
Tax adjustments:
|
||||
|
Non-deductible impairment expense
|
438 | |||
|
Stock option and warrant expense
|
628 | |||
|
Entertainment and other items
|
13 | |||
|
Adjusted taxable loss
|
(1,029 | ) | ||
|
Net Effective Rate
|
37.06 | % | ||
|
Tax benefit from loss carryback
|
$ | (381 | ) | |
|
Refund expected as of December 31, 2009
|
$ | 489 | ||
|
Refunds received
|
(61 | ) | ||
|
Deferred tax asset carried forward from 2009
|
277 | |||
|
Additional benefit from loss carryback above
|
381 | |||
|
Deferred tax asset valuation allowance
|
(658 | ) | ||
|
Tax receivable as of June 30, 2010
|
$ | 427 |
Total current deferred tax asset of $658,000 is not recognized in current operations, since management has determined the tax benefit cannot be reasonably assured of being used in the near future. Total income tax receivable as of June 30, 2010 is $427,000.
NOTE 9 – DISCONTINUED OPERATIONS
During the year ended December 31, 2009, the Company decided to shift its focus from the short term residential mortgage banking and ownership of residential rental property to the Water Project. In order to assist in the funding of the Water Project, the Company began an orderly liquidation of its mortgage and real estate assets. It is expected that this liquidation will be completed by December 31, 2010.
The assets to be liquidated are presented at the lower of cost or current market values, as of June 30, 2010 and December 31, 2009 and are detailed as follows:
|
(in thousands)
|
June 30, 2010
|
Dec 31, 2009
|
||||||
|
Mortgages receivable
|
$ | 371 | $ | 371 | ||||
|
Thomas Park project
|
3,231 | 2,962 | ||||||
|
Other real estate owned
|
650 | 1,529 | ||||||
|
Subtotal
|
4,252 | 4,862 | ||||||
|
Less allowances and depreciation
|
(1,619 | ) | (1,381 | ) | ||||
|
Net book value of property to sell
|
2,633 | 3,481 | ||||||
|
Less amounts owed on real estate to be sold
|
(950 | ) | (950 | ) | ||||
|
Net projected proceeds from mortgage receivables, Thomas Park, and other real estate owned
|
$ | 1,683 | $ | 2,531 | ||||
Within the discontinued operations, during the six months ended June 30, 2010 and 2009, the Company recognized a loss on disposal of real estate of $44,000 and a gain of $56,000, respectively.
Within the discontinued operations, during the six months ended June 30, 2010 and 2009, the Company had $76,000 and $258,000 in revenue, respectively.
Because it is Management’s estimate that the above assets to be sold are stated at the lower of cost or current fair market value, when these assets are sold it is projected not to be a further gain or loss. However, market conditions can change which would then cause a gain or loss to be recognized upon sale.
These assets are held in the Company’s subsidiaries Northsight and Southie.
On June 30, 2010, the Company sold its 100% interest in Legendary to its acting broker, a previous employee of Legendary, for a sales price of $9,000 plus the buyer assuming the office lease. Legendary’s business consisted of residential real estate brokerage and residential real estate management in the Phoenix area. The Company recognized a gain of $82,000 which was partially offset by a write-off of funds advanced to Legendary by the Company of $70,000.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
In February 2008, the Company along with its subsidiary, Northsight opened offices at 2000 S. Colorado Blvd, Suite 200, Denver, Colorado. The lease for this office is $4,701 per month, plus pass throughs. The lease expires February 28, 2011.
The amounts due at the base rate are as follows:
|
Period
|
Amount Due
|
|||
|
2010
|
$ | 30,000 | ||
|
2011
|
$ | 10,000 | ||
The Company also has equipment and software leases with the following commitments:
|
Period
|
Amount Due
|
|||
|
2010
|
$ | 3,000 | ||
|
2011
|
$ | 5,000 | ||
Bank Accounts
As of May 19, 2008, Northsight acquired a $1,200,000 construction loan with Mt. Washington Cooperative Bank for the development of the Thomas Park Property. The loan is due on October 1, 2010 with monthly interest only payments, at prime plus 2% interest rate and an interest rate floor of 7%. As of December 31, 2009 and June 30, 2010, the balance owed on the loan was $950,000. Previously this loan was due on November 19, 2009 but was extended to October 1, 2010. As part of the agreement to extend the loan a principal reduction was due and an establishment of a restricted cash account to cover interest payments until June 1, 2010. As of June 30, 2010, $13,000 was in the restricted cash account.
HCIC Holdings, LLC – Joint Venture
On August 17, 2009, Two Rivers, through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture. Under the terms of the joint venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009 the Company had contributed $1,807,000 in HCIC. As of June 30, 2010 the Company has contributed $1,063,000 over its $2,850,000 capital contribution. The capital contribution was eliminated in the consolidation with HCIC.
Defined Contribution Plan
Two Rivers has a 401(k) profit sharing plan (the “Plan"). Subject to limitations, eligible employees may make voluntary contributions to the Plan. The Company may, at its discretion, make additional contributions to the Plan. The Company did not contribute during the six months ended June 30, 2010.
NOTE 11 – RELATED PARTY TRANSACTIONS
In August 2009, the Company signed a one year lease for office space to be used by Two Rivers Water Company in Walsenburg, Colorado. The rate is $600 per month. The building is owned by an officer of a subsidiary of the Company. Management believes that this rent payment approximates the fair market value.
On August 18, 2009, the Company loaned $110,118 to an individual who was subsequently appointed as an officer of a subsidiary of the Company. The note was secured by cattle and 200,000 shares of the Company’s common stock. On August 24, 2009, the Company loaned an additional $11,840 to the same officer using the same collateral being held against the August 18, 2009 note. The notes were due in six months and had an annual interest rate of 5%. On August 19, 2009, the individual who the Company loaned money was appointed an officer of one of the Company’s subsidiaries. Due to the limitations of having an officer borrow funds from the Company where that person is an officer, the Company requested repayment of the notes from the officer, which were paid in full with interest on November 10, 2009. On November 10, 2009, the Company purchased 320 acres from the officer for $260,000. The Company deems this purchase strategic to its expansion in the water business. An independent appraisal valued the land at $310,000.
Carson Suit
The Company was a co-defendant in a lawsuit filed on April 2, 2008 in Jackson County Circuit Court in Missouri. The Company loaned money to Lydia Carson (borrower) to purchase a home in Kansas City Missouri. The plaintiffs claimed they had a superior lien on the property that was in place before the borrower borrowed money from the Company for the purchase. On June 30, 2010, the amount owed by Lydia Carson to the Company was $253,000 (note balance of $315,000 less escrow held of $62,000). On April 27, 2010 the Company received a judgment granting the Company a first lien position which the Company is in the process of collecting the judgment.
Morrow Suit
The Company was notified in September, 2009 that it was named as a defendant in a lawsuit that alleges either the Company or another third party bank did not have a proper promissory note and deed of trust against a short-term mortgage loan made to a borrower in April, 2008 (“Morrow” loan and suit). After the Morrow loan was made by the Company, the note was improperly transferred to Jaguar. When the improper transfer was discovered by the Company, the Company requested Jaguar to return all documents to the Company or fund the loan. On August 4, 2008, Jaguar re-assigned the note and deed of trust back to the Company. However, Jaguar never returned to the Company the original lending file and documentation. During the period of time that Jaguar was in possession of the Morrow file, the lawsuit alleges that Jaguar used the Morrow note and deed of trust to obtain money from another third-party bank.
Morrow sold the property representing the security interest via the deed of trust in the note in February 2009. Closing occurred through a title company with title insurance issued. At the closing, the Company received $77,000 as payoff on the Morrow note. Therefore, the other third party bank did not receive any proceeds. Presently the third party bank is suing the current owner of the property that Morrow sold for payment on the note. The property owner has filed a complaint in State of Colorado, Adam County District Court naming Northsight and the third party bank as defendants. The plaintiff seeks either Northsight to pay the third party bank or for the third party bank to release its claim to the property. If Northsight is not successful in its defense, then its exposure is $77,000 plus potential fees and interest.
The Company believes it properly received the proceeds and is being represented by legal counsel to defend its position. A contingency exists with respect to this matter, the ultimate resolution of which cannot be presently determined.
This section includes all subsequent events through the date the financial statements were available to be issued. The following is in addition to subsequent events mentioned throughout the footnotes:
Subsequent to June 30, 2010 and through August 13, 2010, the Company has received an additional $86,000 in its current private placement, representing 86,000 common stock shares to be issued.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note about Forward-Looking Statements
This From 10-Q contains forward-looking statements, such as statements relating to our financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. By making these forward-looking statements, we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the Securities and Exchange Commission under the Federal securities laws. Our actual results may differ materially from our forward-looking statements.
Plan of Operations - Overview
During 2009, Two Rivers focused its business development activities on winding down its real estate activities through its subsidiaries Northsight and Southie. With funds generated from the liquidation of real estate promissory notes receivable and selling residential real estate, Two Rivers entered into the Water Business beginning in July 2009 and has dedicated the majority of its resources to expanding the Water Business. There can be no assurances that any of our investments will be successful.
On March 17, 2010, the Company formed Two Rivers Farms, LLC (“Farming”) to acquire and operate agriculture land either as a sole operator or in joint venture with other individuals and companies (the “Farming Business”). Two Rivers is Farming’s sole member and owner. Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farms, LLC.
On March 17, 2010, the Company formed Two Rivers Energy, LLC (“Energy”), a Colorado limited Liability Company, to produce alternative energy on land owned by the Company, or the Company’s subsidiaries. Two Rivers is Energy’s sole member and owner. The development of alternative energy equipment and the subsequent production of alternative energy will mostly be from solar and might be operated through a joint venture with one or more other entities, not yet determined (the “Energy Business”). Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.
On July 13, 2010, the Company formed Two Rivers Water, LLC (“Water”), a Colorado limited liability company, to secure additional water rights, rehabilitate water storage structures and to develop one or more special water districts.
In addition, Two Rivers operates the following businesses: (a) property management and residential real estate brokerage in Arizona, and (b) development of a three unit residential condominium in Boston Massachusetts. The Company is in the process of liquidating its real estate and mortgage assets through the sale of residential properties acquired through foreclosure and the sale or receive a payoff of the two remaining mortgages it holds.
On June 30, 2010, the Company sold its 100% interest in Legendary Investment Group, LLC (“Legendary”) to its acting broker, a previous employee of Legendary, for a sales price of $9,000 plus the buyer assuming the office lease.
The Thomas Park project in South Boston (with an anticipated additional expenditure of $250,000) is ready for sale and is listed for a gross selling price of $2,283,000. As of August 3, 2010, we have received and accepted offers on all three units and have a signed purchase and sale agreement on one unit. We are working with our realtor and our legal counsel in Boston to enter into a purchase and sale agreement on the two remaining accepted offers. As of June 30, 2010 we have invested $3,231,000 in Thomas Park, less an impairment of $1,297,000, for a carrying value of $1,934,000.
As of June 30, 2010, we have $467,000 in real estate owned (net, after an impairment of $150,000 and depreciation of $33,000). It is management’s intent to liquidate all of this property during 2010. During this liquidation, we do not anticipate any additional material expenses to be incurred. If the property is held in Southie, proceeds from liquidation will be transferred to Two Rivers as a reduction of the intercompany debt that Southie and Northsight owe to the parent company. Management expects to have the liquidation of real estate owned and mortgage notes receivable held completed by December 31, 2010.
To augment our efforts on the development of the Water Business and other related businesses we are in the process of completing the purchase of the remaining outstanding shares that we do not own of the Mutual Ditch Company and additional land which would assist in perfecting water rights and provide additional water resources. As of June 30, 2010, HCIC had a 74% ownership in the Mutual Ditch Company.
In order to assist with additional capital formation, our Board approved a private placement effective January 5, 2010 to offer the Company’s restricted common stock at $1.00/share. The maximum offering is 5,000,000 shares, no minimum, and the offering originally expired February 28, 2010, and was subsequently extended by the Board to August 31, 2010. As of June 30, 2010 and August 3, 2010, 1,776,000 and 1,864,000 cumulative subscriptions have been received, respectively. These subscriptions have been paid in cash of $1,776,000 and $1,864,000, respectively. There can be no assurances that the Company will be able to raise funds under its current private placement.
Results of Operations
For the Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009
During the six months ended June 30, 2010, we recognized revenues from continuing operations of $64,000, compared to $45,000 in revenues from continuing operations during the six months ended June 30, 2009. Within our discontinued operations, during the six months ended June 30, 2010 and 2009 we recognized revenues of $32,000 compared to $258,000, respectively. The decrease of $226,000 in our discontinued operations is a result of our company’s new focus on the Water, Farming and Energy Business and the liquidation of our legacy mortgage and real estate business.
The Company had no direct cost of delivering our continuing operations for the six months ended June 30, 2010 and 2009. In terms of our discontinued operations, the direct cost of delivering the discontinued operations were $29,000 and $141,000, for the six months ended June 30, 2010 and 2009, respectively. The decrease of $112,000 is due to our winding down of the discontinued operations.
Operating expenses from continuing operations during the six months ended June 30, 2010 and 2009 were $1,688,000 and $195,000, respectively. The increase of $1,493,000 is due to the non-cash expense of granting of restrictive stock units and extending warrants expiration dates ($630,000) and increased expenses as we expand our business focus in water, farming and energy.
Operating expenses from discontinued operations during the six months ended June 30, 2010 and 2009 were $556,000 and $1,008,000, respectively. This reflects our new business focus and winding down of our discontinued operations. For discontinued operations, we recognized an after tax benefit loss of $536,000 and $782,000 for the six months ended June, 2010 and 2009, respectively.
For continuing operations, during the six months ended June 30, 2010 and 2009, we recognized a net loss $1,845,000 and $149,000, respectively. The increased loss of $1,696,000 is due from our rapid expansion of the Water, Farming and Energy Business and increased stock based compensation.
LIQUIDITY
From the Company’s inception through June 30, 2010, we have funded our operations primarily from the following sources:
|
-
|
Equity proceeds through private placements of Two Rivers securities;
|
|
-
|
Revenue generated from operations;
|
|
-
|
Loans and lines of credit;
|
|
-
|
Sales of residential properties acquired through deed-in-lieu actions;
|
|
-
|
Sales of equity investments, and
|
|
-
|
Proceeds from the exercise of legacy Navidec, Inc. options
|
Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital. As of June 30, 2010, the Company had cash and cash equivalents of $220,000. Cash flow used by our operating activities totaled $919,000 for the six months ended June 30, 2009 compared to operating activities using $344,000 for the six months ended June 30, 2009.
As of June 30, 2010, the Company had $708,000 in current assets and $1,517,000 in current liabilities. The Company intends to continue with its strategy of liquidating its legacy real estate assets to expand their Water, Farming and Energy Business and on its current private placement of its restricted common shares in order to provide additional capital to be used in the support of its operations.
Cash flows used by our investing activities for the six months ended June 30, 2010 were $6,035,000 compared to cash provided by our investing activities of $564,000 for the six months ended June 30, 2009. The increase is primarily due to our purchase of the shares in the Mutual Ditch Company for $5,939,000.
For the six months ended June 30, 2009 we provided $564,000 from investing activities. We invested $199,000 in real estate in Boston, Massachusetts (Thomas Park), and received $1,196,000 from a sale of REO properties. Through our marketable securities trading efforts, we purchased $123,702,000 in marketable securities and sold $123,276,000 in marketable securities.
Net cash produced in financing activities was $6,558,000 for the six months ended June 30, 2010 compared to a use of cash of $318,000 for the six months ended June 30, 2009. During the six months ended June 30, 2010 we increased our long-term borrowings by $4,944,000 through owner financing of the water and land purchase for the Water Business, and sold $1,620,000 for cash in the Company’s common stock in a private placement.
Subsequent to June 30, 2010 and through August 3, 2010, the Company has sold $86,000 in its current private placement, representing 86,000 restricted common stock shares to be issued.
For the six months ended June 30, 2009 from financing activities we used $318,000 in cash to purchase back our common stock, which was retired and fully pay a promissory note.
CRITICAL ACCOUNTING POLICIES
Two Rivers has identified the policies below as critical to Two Rivers’ business operations and the understanding of Two Rivers results from operations. The impact and any associated risks related to these policies on the Company’s business operations is discussed throughout Management’s Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect Two Rivers reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements beginning on page [INSERT PAGE NUMBER] of this document. Note that the Company’s preparation of this document requires Two Rivers to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of Two Rivers’ financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
RESTATEMENT OF RESULTS
Restatement of Results
Subsequent to the issuance of both the Company's audited financial statements for the year ended December 31, 2009 and its unaudited financial statements for the quarterly periods ended March 31, 2010 and June 30, 2010 and to the issuance of a professional valuation of the Mutual Ditch Company issued October 29, 2010, the Company deemed that it was necessary to restate its financial statements for the quarters ended March 31, 2010 and June 30, 2010 as contained in its Quarterly Reports on Form 10Q, filed May 14, 2010 and August 16, 2010, respectively.
Beginning with the quarter ending September 30, 2009, the Company consolidated the financial results of HCIC. As of December 31, 2009, HCIC owned 18% of the Mutual Ditch Company. During the six months ended June 30, 2010, HCIC purchased additional shares of the Mutual Ditch Company and owned 74% of the Mutual Ditch Company shares. For the quarters ended March 31, 2010 and June 30, 2010, the Company estimated the value of the Mutual Ditch Company to be equal to the valuation of the price paid for shares in the Mutual Ditch Company plus the valuation of the options contributed by TRB. The Company consolidated HCIC and the Mutual Ditch Company based on this valuation, pending a formal appraisal. (See Principles of Consolidation.)
On October 29, 2010, the Company received a valuation of the Mutual Ditch Company. The valuation of the Mutual Ditch Company as of March 2, 2010 is estimated to be $24,196,000. Therefore, the valuation of the asset “Water Shares (HCIC)” along with a reduction of the “Options on real estate” was restated to reflect this new valuation. The corresponding offset increased the valuation of the non-controlling interest to its fair value.
In accordance with ASC 820 Fair Value Measurements and Disclosures, the ASC establishes a framework for measuring fair value, establishes a fair value hierarchy based on inputs used to measure fair value, and expands disclosure about fair value measurements. Adopting this statement has not had an effect on the Company’s financial condition, cash flows, or results of operations.
In accordance with ASC 820, the financial instruments have been categorized, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels, as follows:
Level 1. Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g. U.S. Government securities and active exchange traded equity securities.
Level 2. Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g. certain corporate and municipal bonds and certain preferred stocks). This includes (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3. Inputs that are unobservable. Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instruments (e.g. certain structured securities and privately held investments).
The professional appraisal of the Mutual Ditch Company used Level 2 inputs whereby the water rights were valued using comparable prices in markets that are not active. The infrastructure of the Mutual Ditch Company, including water storage, ditches and diversion points, was valued at replacement cost less physical obsolescence and deterioration. The increase in the value of the asset did not have any effect on the Company’s unaudited statement of operations for the six months ended June 30, 2010.
|
June 30, 2010
|
||||||||||||
|
Restated
|
||||||||||||
|
ASSETS:
|
Unaudited
|
Adjustments
|
Unaudited
|
|||||||||
|
Current Assets:
|
||||||||||||
|
Cash and cash equivalents
|
$ | 207 | 207 | |||||||||
|
Restricted cash
|
13 | 13 | ||||||||||
|
Advances and accounts receivable
|
58 | 58 | ||||||||||
|
Income taxes receivable
|
427 | 427 | ||||||||||
|
Deposits and prepaid expenses
|
3 | 3 | ||||||||||
|
Total Current Assets
|
708 | 708 | ||||||||||
|
Property, equipment and software, net (Note 2)
|
185 | 185 | ||||||||||
|
Other Assets
|
||||||||||||
|
Mortgages receivable - Net of allowance for bad debts
|
232 | 232 | ||||||||||
|
Investment in Boston Property, net of impairment
|
1,934 | 1,934 | ||||||||||
|
Land
|
1,294 | 1,294 | ||||||||||
|
Water shares (HCIC)
|
10,677 | 13,519 | 24,196 | |||||||||
|
Options on real estate
|
637 | (637 | ) | - | ||||||||
|
Dam Construction
|
436 | 436 | ||||||||||
|
Other real estate owned - net of impairment and accumulated depreciation
|
467 | 467 | ||||||||||
|
Farm product
|
113 | 113 | ||||||||||
|
Other assets
|
9 | 9 | ||||||||||
|
Total Other Assets
|
15,799 | 28,681 | ||||||||||
|
TOTAL ASSETS
|
$ | 16,692 | 12,882 | 29,574 | ||||||||
|
LIABILITIES & STOCKHOLDERS' EQUITY:
|
||||||||||||
|
Current Liabilities:
|
||||||||||||
|
Accounts payable
|
$ | 538 | 538 | |||||||||
|
Short term borrowings
|
950 | 950 | ||||||||||
|
Accrued liabilities
|
29 | 29 | ||||||||||
|
Total Current Liabilities
|
1,517 | 1,517 | ||||||||||
|
Notes Payable - Long Term
|
7,119 | 7,119 | ||||||||||
|
Total Liabilities
|
8,636 | 8,636 | ||||||||||
|
Stockholders' Equity:
|
||||||||||||
|
Common stock
|
11 | 11 | ||||||||||
|
Additional paid-in capital
|
11,943 | 11,943 | ||||||||||
|
Accumulated (deficit)
|
(6,228 | ) | (6,228 | ) | ||||||||
|
Total Two Rivers Water Company Shareholders' Equity
|
5,726 | 5,726 | ||||||||||
|
Noncontrolling interest in subsidiaries
|
2,330 | 12,882 | 15,212 | |||||||||
|
Total Stockholders' Equity
|
8,056 | 20,938 | ||||||||||
|
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 16,692 | 12,882 | 29,574 | ||||||||
REVENUE RECOGNITION
Two Rivers follows very specific and detailed guidelines in measuring revenue; however, certain judgments may affect the application of Two Rivers’ revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause Two Rivers’ operating results to vary significantly from quarter to quarter and could result in future operating losses.
ALLOWANCE FOR BAD DEBT
Two Rivers’ policy on allowances for bad debt determines the timing and recognition of expenses. The Company follows guidelines that establish allowances based off of historical and account specific trends; however, certain judgments affect the application of Two Rivers’ bad debt allowance policy. Two Rivers receivables are recorded net of an allowance for doubtful accounts which requires management to estimate amounts due which may not be collected. This estimate requires consideration of general economic conditions, overall historical trends related to the Company’s collection of receivables, customer specific payment history, and customer specific factors affecting their ability to pay amounts due. Management routinely assesses and revises its estimate of the allowance for doubtful accounts. As of June 30, 2010 and December 31, 2009, we had $1,619,000 and $1,390,000, respectively, in allowances for bad debt and valuation impairments, as follows:
|
Allowance for:
|
June 30, 2010
|
Dec 31, 2009
|
||||||
|
Short Term Mortgages
|
$ | 139,000 | 139,000 | |||||
|
Boston Property – Thomas Park
|
1,297,000 | 889,000 | ||||||
|
Real Estate owned – depreciation
|
33,000 | 40,000 | ||||||
|
Real Estate owned – impairments
|
150,000 | 313,000 | ||||||
|
Total
|
$ | 1,619,000 | 1,381,000 | |||||
GOODWILL AND INTANGIBLE ASSETS
During the year ended 2009 and subsequently, the Company has acquired water shares in the Mutual Ditch Company, which is considered an intangible asset. Currently, the water shares are recorded at purchase price less the Company’s prorata share of the negative net worth in the Mutual Ditch Company. Management evaluates the carrying value, and if necessary, will establish an impairment of value to reflect current fair market value. Currently, there are no impairments on the land and water shares.
Under the terms of the HCIC joint venture, the non-related party owning 50% of HCIC, TRB, contributed options on purchasing the Mutual Ditch Company along with purchase agreements for acquiring land. TRB also contributed cash being held in escrow or that had been paid to owners of the shares of the Mutual Ditch Company. The Company initially valued the TRB’s contribution to HCIC at $2,850,000 and attributed this cost to options on real estate. As options are exercised, the prorata amount is transferred to the cost of water shares. As of June 30, 2010, the balance of the options on real estate was $637,000 and water shares was $10,677,000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Two Rivers is exposed to the impact of interest rate changes and change in the market values of the Company’s investments. Based on Two Rivers' market risk sensitive instruments outstanding as of June 30, 2010, as described below, it has determined that there was no material market risk exposure to the Company's consolidated financial position, results of operations, or cash flows as of such date. Two Rivers does not enter into derivatives or other financial instruments for trading or speculative purposes.
INTEREST RATE RISK
At June 30, 2010, the Company’s exposure to market rate risk for changes in interest rates relates primarily to its borrowings, as well as, its mortgage services business. Two Rivers has not used derivative financial instruments in its credit facilities. A hypothetical 10% increase in the Prime Rate would not be significant to the Company's financial position, results of operations, or cash flows.
IMPAIRMENT POLICY
At least once every quarter, Two Rivers examines all of their assets for proper valuation and to determine if an allowance for impairment is necessary. In terms of real estate owned, this impairment examination also includes the accumulated depreciation. Management examines market valuations and if an additional impairment is necessary for lower of cost or market, then impairment is booked. However, if Management, based on changes in the market value of the assets, determines the impairment to be over stated, the existing impairment is reduced to reflect management’s new estimate of value.
INVESTMENT RISK
From time to time Two Rivers has made investments in equity instruments in companies for business and strategic purposes. These investments, when held, are included in other long-term assets and are accounted for under the cost method since ownership is less than 20% and Two Rivers does not assert significant influence.
INFLATION
Two Rivers does not believe that inflation will have a material negative impact on its future operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and change in the market values of our real estate properties. Based on our market risk sensitive instruments outstanding as of June 30, 2010, as described below, it was determined that there was no material market risk exposure to our consolidated financial position, results of operations, or cash flows as of such date. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
As required by SEC Rule 15d-15(b), Mr. John McKowen, our Chief Executive Officer and Mr. Wayne Harding, our Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report
The Company, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2010. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting described below, the Company's disclosure controls and procedures were not effective as of June 30, 2010.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
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(i)
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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(ii)
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made on in accordance with authorizations of our management and directors; and
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(iii)
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting as of the quarter ended June 30, 2010, is that we believe that internal control over financial reporting continues not to be effective, and we in the process of improving controls to the extent possible given the limited size of our accounting and executive staff. We have identified certain material weaknesses of accounting relating to a shortage of accounting and reporting personnel due to limited financial resources and the size of our Company. This material weakness can lead to the following:
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An inability to ensure there is timely analysis and review of accounting records, spreadsheets, and supporting data; and
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an inability to effectively monitor access to, or maintain effective controls over changes to, certain financial application programs and related data.
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Considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations and the fact that we have been a small business with limited employees caused a weakness in internal controls involving the areas disclosed above.
In 2008, we hired a full time in-house Certified Public Accountant, who, as of September 2009, became our Chief Financial Officer and have taken the following steps:
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we have trained additional staff members to assist in the finance and accounting functions to ensure that there are separation of duties, as much as possible given our limited staff; and
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we are in the process of analyzing our processes for all business units and the establishment of formal policies and procedures with necessary segregation of duties, which will establish mitigating controls to compensate for the risk due to lack of segregation of duties.
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This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this quarterly report.
There was no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
Carson Suit
The Company was a co-defendant in a lawsuit filed on April 2, 2008 in Jackson County Circuit Court in Missouri. The Company loaned money to Lydia Carson (borrower) to purchase a home in Kansas City Missouri. The plaintiffs claimed they had a superior lien on the property that was in place before the borrower borrowed money from the Company for the purchase. On June 30, 2010, the amount owed by Lydia Carson to the Company was $253,000 (note balance of $315,000 less escrow held of $62,000). On April 27, 2010 the Company received a judgment granting the Company a first lien position which the Company is in the process of foreclosing on the lien.
Morrow Suit
The Company was notified in September, 2009 that it was named as a defendant in a lawsuit that alleges either the Company or another third party bank did not have a proper promissory note and deed of trust against a short-term mortgage loan made to a borrower in April, 2008 (“Morrow” loan and suit). After the Morrow loan was made by the Company, the note was improperly transferred to Jaguar. When the improper transfer was discovered by the Company, the Company requested Jaguar to return all documents to the Company or fund the loan. On August 4, 2008, Jaguar re-assigned the note and deed of trust back to the Company. However, Jaguar never returned to the Company the original lending file and documentation. During the period of time that Jaguar was in possession of the Morrow file, the lawsuit alleges that Jaguar used the Morrow note and deed of trust to obtain money from another third-party bank.
Morrow sold the property representing the security interest via the deed of trust in the note in February 2009. Closing occurred through a title company with title insurance issued. At the closing, the Company received $77,000 as payoff on the Morrow note. Therefore, the other third party bank did not receive any proceeds. Presently the third party bank is suing the current owner of the property that Morrow sold for payment on the note. The property owner has filed a complaint in State of Colorado, Adam County District Court naming Northsight and the third party bank as defendants. The plaintiff seeks either Northsight to pay the third party bank or for the third party bank to release its claim to the property. If Northsight is not successful in its defense, then its exposure is $77,000 plus potential fees and interest.
The Company believes it properly received the proceeds and is being represented by legal counsel to defend its position. A contingency exists with respect to this matter, the ultimate resolution of which cannot be presently determined.
Not applicable to Smaller Reporting Issuers.
During the six months ended June 30, 2010 the Company’s Board authorized a private placement of up to 5,000,000 shares at $1.00 per share to accredited investors. As of June 30, 2010 the Company had accepted subscriptions representing 1,776,000 shares.
During the six months ended June 30, 2010, the Company converted 1,905,948 of its stock options to Restrictive Stock Units (“RSUs”). The Board also granted 2,200,000 RSUs to the Company’s key employees.
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”). All of the individuals and/or entities listed above that purchased the unregistered securities were almost, all known to the Company and its management, through pre-existing business relationships, as long standing business associates and/or employees. All purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and were afforded access to management of the Company in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
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Number
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Description
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31.1
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
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Filed Herewith
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31.2
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Certification of Principal Financial Officer pursuant to the Section 302 of the Sarbanes-Oxley Act
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Filed Herewith
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32.1
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Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
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Filed Herewith
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32.2
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Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
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Filed Herewith
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Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TWO RIVERS WATER COMPANY (Registrant)
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Dated: February 28, 2011
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By: /s/ John McKowen
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Chief Executive Officer & Chairman of the Board
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By: /s/ Wayne Harding
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Chief Financial Officer & Principal Accounting Officer
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