Attached files
| file | filename |
|---|---|
| EX-31.1 - TURV MCKOWEN EXHIBIT 31 - TWO RIVERS WATER & FARMING Co | exh31mckowen2011q3.htm |
| EX-31.2 - TURV HARDING EXHIBIT 31 - TWO RIVERS WATER & FARMING Co | exh31harding2011q3.htm |
| EX-32.2 - TURV HARDING EXHIBIT 32 - TWO RIVERS WATER & FARMING Co | exh32harding2011q3.htm |
| EX-32.1 - TURV MCKOWEN EXHIBIT 32 - TWO RIVERS WATER & FARMING Co | exh32mckowen2011q3.htm |
| EXCEL - IDEA: XBRL DOCUMENT - TWO RIVERS WATER & FARMING Co | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2011
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)
|
Colorado
|
13-4228144
|
|
|
State or other jurisdiction of incorporation or organization
|
I.R.S. Employer Identification No.
|
|
|
2000 South Colorado Boulevard, Annex Ste 420, Denver, CO 80222
|
||
|
(Address of principal executive offices) (Zip Code)
|
||
|
Registrant’s telephone number, including area code:
(303)222-1000
|
||
|
Securities registered pursuant to Section 12(b) of the Act:
|
||
|
Title of each class registered
|
Name of each exchange on which registered
|
|
|
Not Applicable
|
Not Applicable
|
|
|
Securities registered pursuant to Section 12(g) of the Act:
|
||
|
Common Stock
(Title of class)
|
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 |X| 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).
|
Large accelerated filer
|
[___]
|
Accelerated filer
|
[___]
|
|
|
Non-accelerated filer
(Do not check if a smaller reporting company)
|
[___]
|
Smaller reporting company
|
[X]
|
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 November 1, 2011 there were 22,995,114 shares outstanding of the registrant's Common Stock.
|
Page
|
||
|
Item 1
|
Financial Statements (Unaudited)
|
|
|
September 30, 2011 and December 31, 2010
|
1
|
|
|
Condensed Consolidated Statements of Operations – Three months and Nine months ended September 30, 2011 and 2010
|
2
|
|
|
Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010
|
3
|
|
|
5
|
||
|
Item 2
|
19
|
|
|
Item 3
|
23
|
|
|
Item 4
|
23
|
|
|
|
||
|
Item 1
|
Legal Proceedings
|
25
|
|
Item 2
|
Changes in Securities
|
25
|
|
Item 3
|
Defaults Upon Senior Securities – Not Applicable
|
|
|
Item 4
|
Removed and Reserved.
|
|
|
Item 5
|
Other Information – Not Applicable
|
|
|
Item 6
|
Exhibits
|
26
|
|
27
|
||
Two Rivers Water Company -- September 30, 2011 -- 10Q
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
|
Sept 30, 2011
|
December 31, 2010
|
|||||||
|
ASSETS:
|
Unaudited
|
|||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 1,941 | $ | 645 | ||||
|
Marketable securities
|
149 | - | ||||||
|
Accrued interest receivable
|
1 | 3 | ||||||
|
Advances and accounts receivable
|
69 | 38 | ||||||
|
Farm product (Note 2)
|
26 | - | ||||||
|
Deposits
|
80 | - | ||||||
|
Prepaid expenses
|
- | 13 | ||||||
|
Total Current Assets
|
2,266 | 699 | ||||||
|
Property, equipment and software, net
|
1,206 | 156 | ||||||
|
Other Assets
|
||||||||
|
Debt issuance costs
|
785 | - | ||||||
|
Land (Note 2)
|
2,690 | 1,279 | ||||||
|
Water rights and infrastructure (Note 2)
|
27,216 | 24,216 | ||||||
|
Options on real estate and water shares (Note 2)
|
50 | 100 | ||||||
|
Dam construction (Note 2)
|
509 | 489 | ||||||
|
Discontinued operations - assets held for sale (Notes 2, 6)
|
- | 259 | ||||||
|
Total Other Assets
|
31,250 | 26,343 | ||||||
|
TOTAL ASSETS
|
$ | 34,722 | $ | 27,198 | ||||
|
LIABILITIES & STOCKHOLDERS' EQUITY:
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$ | 425 | $ | 463 | ||||
|
Current portion of notes payable (Note 3)
|
24 | - | ||||||
|
Accrued liabilities
|
309 | 114 | ||||||
|
Total Current Liabilities
|
758 | 577 | ||||||
|
Notes Payable - Long Term (Note 3)
|
13,361 | 9,128 | ||||||
|
Total Liabilities
|
14,119 | 9,705 | ||||||
|
Stockholders' Equity:
|
||||||||
|
Common stock, $0.001 par value, 100,000,000 shares authorized, 22,995,114 and 19,782,916 shares issued and outstanding at Sept 30, 2011 and December 31, 2010, respectively
|
23 | 20 | ||||||
|
Additional paid-in capital
|
37,401 | 28,949 | ||||||
|
Accumulated (deficit)
|
(18,950 | ) | (13,587 | ) | ||||
|
Total Two Rivers Water Company Shareholders' Equity
|
18,474 | 15,382 | ||||||
|
Noncontrolling interest in subsidiary (Note 2)
|
2,129 | 2,111 | ||||||
|
Total Stockholders' Equity
|
20,603 | 17,493 | ||||||
|
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
|
$ | 34,722 | $ | 27,198 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMANY AND SUBSIDIARIES
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Revenue
|
||||||||||||||||
|
Member assessments
|
$ | 25 | $ | 34 | $ | 73 | $ | 83 | ||||||||
|
Operating Expenses:
|
||||||||||||||||
|
General and administrative
|
1,932 | 800 | 4,769 | 2,475 | ||||||||||||
|
Depreciation and amortization
|
24 | 8 | 73 | 21 | ||||||||||||
|
Total operating expenses
|
1,956 | 808 | 4,842 | 2,496 | ||||||||||||
|
(Loss) from operations
|
(1,931 | ) | (774 | ) | (4,769 | ) | (2,413 | ) | ||||||||
|
Other income (expense)
|
||||||||||||||||
|
Net interest expense
|
(251 | ) | (109 | ) | (634 | ) | (283 | ) | ||||||||
|
Gain (Loss) from previous non-controlling interest
|
- | (273 | ) | - | - | |||||||||||
|
Gain (Loss) on extinguishment of notes payable
|
384 | - | 196 | - | ||||||||||||
|
Other income (expense)
|
(18 | ) | (37 | ) | (10 | ) | (125 | ) | ||||||||
|
Total other income (expense)
|
115 | (419 | ) | (448 | ) | (408 | ) | |||||||||
|
Net (Loss) from continuing operations before taxes
|
(1,816 | ) | (1,193 | ) | (5,217 | ) | (2,821 | ) | ||||||||
|
Income tax (provision) benefit
|
- | - | - | - | ||||||||||||
|
Net (Loss) from continuing operations
|
(1,816 | ) | (1,193 | ) | (5,217 | ) | (2,821 | ) | ||||||||
|
Discontinued Operations (Note 10)
|
||||||||||||||||
|
Loss from operations of discontinued real estate and mortgage business
|
(100 | ) | (150 | ) | (131 | ) | (630 | ) | ||||||||
|
Income tax (provision) benefit from discontinued operations
|
- | - | - | - | ||||||||||||
|
(Loss) on discontinued operations
|
(100 | ) | (150 | ) | (131 | ) | (630 | ) | ||||||||
|
Net (Loss)
|
(1,916 | ) | (1,343 | ) | (5,348 | ) | (3,451 | ) | ||||||||
|
Net loss (income) attributable to the noncontrolling interest (Note 2)
|
7 | (9 | ) | (18 | ) | - | ||||||||||
|
Net (Loss) attributable to Two Rivers Water Company
|
$ | (1,909 | ) | $ | (1,352 | ) | $ | (5,366 | ) | $ | (3,451 | ) | ||||
|
(Loss) Per Share - Basic and Dilutive:
|
||||||||||||||||
|
(Loss) from continuing operations
|
$ | (0.08 | ) | $ | (0.08 | ) | $ | (0.24 | ) | $ | (0.19 | ) | ||||
|
(Loss) from discontinued operations
|
- | (0.01 | ) | - | (0.05 | ) | ||||||||||
|
Total
|
$ | (0.08 | ) | $ | (0.09 | ) | $ | (0.24 | ) | $ | (0.24 | ) | ||||
|
Weighted Average Shares Outstanding:
|
||||||||||||||||
|
Basic and Dilutive
|
22,054 | 15,522 | 21,832 | 14,387 | ||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
|
For the nine months ended Sept 30,
|
||||||||
|
2011
|
2010
|
|||||||
|
Cash Flows from Operating Activities:
|
||||||||
|
Net (Loss)
|
$ | (5,348 | ) | $ | (3,451 | ) | ||
|
Adjustments to reconcile net income or (loss) to net cash (used in) operating activities:
|
||||||||
|
Depreciation (including discontinued operations)
|
73 | 49 | ||||||
|
Amortization of debt issuance costs and pre-paids
|
55 | - | ||||||
|
Legendary Investment sale and write off
|
- | 49 | ||||||
|
Increase in reserves and impairments
|
- | 463 | ||||||
|
Loss from REOs sold (discontinued operations)
|
- | 44 | ||||||
|
(Gain) Loss on sale of investments and assets held
|
131 | 132 | ||||||
|
(Gain) on extinguishment of notes payables
|
(196 | ) | - | |||||
|
Stock based compensation and warrant expense
|
2,103 | 990 | ||||||
|
Stock for Services
|
559 | - | ||||||
|
Net change in operating assets and liabilities
|
54 | 295 | ||||||
|
Net Cash (Used in) Operating Activities
|
(2,569 | ) | (1,429 | ) | ||||
|
Cash Flows from Investing Activities:
|
||||||||
|
Investments (increased)/decreased:
|
||||||||
|
Boston real estate and other residential real estate
|
- | 1,925 | ||||||
|
Proceeds from REO properties and other assets sold
|
- | 498 | ||||||
|
Proceeds from asset held for sale
|
- | 176 | ||||||
|
Proceeds from fixed assets sold
|
- | 18 | ||||||
|
Purchase of property, equipment and software
|
(978 | ) | (131 | ) | ||||
|
Purchase of land, water shares, infrastructure
|
(1,032 | ) | (8,423 | ) | ||||
|
Dam construction
|
(20 | ) | (310 | ) | ||||
|
Net Cash Provided by/(Used in) Investing Activities
|
(2,030 | ) | (6,247 | ) | ||||
|
Cash Flows from Financing Activities:
|
||||||||
|
Proceeds from issuance of convertible notes
|
7,332 | - | ||||||
|
Payment of offering costs
|
(653 | ) | - | |||||
|
Payment on convertible notes
|
(38 | ) | - | |||||
|
Payment on Note Payable
|
(1,254 | ) | - | |||||
|
Payment for settlement of note payable
|
(105 | ) | - | |||||
|
(Decrease) in short term borrowings
|
- | (950 | ) | |||||
|
Options and warrants exercised
|
613 | - | ||||||
|
Increase in long term borrowings
|
- | 6,951 | ||||||
|
Retirement of Common Stock
|
- | (5 | ) | |||||
|
Private placement - net of offering costs
|
- | 2,204 | ||||||
|
Net Cash Provided by Financing Activities
|
5,895 | 8,200 | ||||||
|
Net Increase in Cash & Cash Equivalents
|
1,296 | 524 | ||||||
|
Beginning Cash & Cash Equivalents
|
645 | 616 | ||||||
|
Ending Cash & Cash Equivalents
|
$ | 1,941 | $ | 1,140 | ||||
|
Continued on the next page.
|
||||||||
|
Continued from previous page.
|
|||||||||
| Supplemental Disclosure of Cash Flow Information | |||||||||
|
Cash paid for interest
|
$ | 353 | $ | 88 | |||||
|
Cash received from income tax refunds
|
$ | - | $ | 501 | |||||
|
Conversion of note receivable for loan on land
|
$ | - | $ | 295 | |||||
|
Common stock issued for land and water share purchase
|
$ | - | $ | 500 | |||||
|
Increase in water shares due to acquisition costs
|
$ | - | $ | 174 | |||||
|
Common stock issued in conjunction with extinguishment of notes payable
|
$ | 3,056 | $ | - | |||||
|
Acquisition of Orlando Reservoir for seller financed note payable
|
$ | 187 | $ | - | |||||
|
Stock issued for partial payment for the purchase of Orlando Reservoir No.2, LLC
|
$ | 1,557 | $ | - | |||||
|
Equipment purchases financed
|
$ | 146 | $ | - | |||||
|
Fair value of warrants issued with Series B offering
|
$ | 1,675 | $ | - | |||||
|
Warrants for debt issuance costs
|
$ | 174 | $ | - | |||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
TWO RIVERS WATER COMPANY AND SUBSIDIARIES
For the Nine Months Ended September 30, 2011 and September 30, 2010
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS
GENERAL
The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to “Two Rivers Water Company,” “Two Rivers,” or the “Company” is to Two Rivers Water Company and its subsidiaries. The “Farming Business” refers to Two Rivers’ development and operating of irrigated farmlands. The “Water Business” refers to Two Rivers’ acquisition of water rights, the improvement of water storage and distribution assets and the use of water rights in farming and other markets.
Two Rivers was incorporated in December 2002 in the state of Colorado. 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 centered in Colorado.
Two Rivers currently operates irrigated farming operations along with a water acquisition, development and distribution business in southern Colorado. Detailed information on Two Rivers’ Business and organization is available in the Company’s 2010 10K filing and in the Company’s S-1 filing.
On January 28, 2011, Two Rivers through a wholly-owned subsidiary, TRW Orlando Water Assets, LLC, purchased the Orlando Reservoir (“Orlando”) containing 3,110 acre feet of storage and 9 cubic feet per second (cfs) of direct flow water rights for $3,100,000.
In the nine months ended September 30, 2011, Two Rivers completed two convertible debt offerings. In February 2011, a $2,000,000 convertible debt offering was completed to fund the development of farmland, water assets and other related assets held in Two Rivers Farms F-1, LLC (“F-1”), a wholly owned subsidiary. In August 2011, a $5,332,000 convertible debt offering, with warrants, was completed to fund the development of farmland, water assets and other related assets held in Two Rivers Farms F-2, LLC as discussed below.
On April 5, 2011, the Company formed Two Rivers Farms F-2, LLC (“F-2”) to acquire and dedicate 1,500 acres of farmland and associated water rights to grow organic alfalfa and hay. Part of the F-2 farmland will be prepared and planted in the fall of 2011 to begin production in 2012. The remaining F-2 farmland will be planted in early 2012.
SUBSIDIARIES
Two Rivers is the parent company and owns 100% of HCIC Holdings LLC (“HCIC”), Two Rivers Water LLC, and Two Rivers Farms LLC. HCIC owns 91% of the Mutual Ditch Company as of September 30, 2011. Two Rivers Farms, LLC owns 100% of Two Rivers Farms F-1, LLC and Two Rivers Farms F-2, LLC.
HCIC HOLDINGS, LLC
On August 17, 2009, Two Rivers, and Two Rivers Basin, LLC an unrelated Colorado limited liability company (“TRB”), formed HCIC, a joint venture.
On September 14, 2010, the Company obtained 100% ownership of HCIC. The owners of TRB were issued 7,500,000 shares of the Company’s common stock in exchange for 100% of their ownership in HCIC. This transaction was booked at fair value and substantiated by an independent third party appraisal as of March 2, 2010 and updated as of September 30, 2010.
HUERFANO-CUCHARAS IRRIGATION COMPANY
Huerfano-Cucharas Irrigation Company (“Mutual Ditch Company”); a Colorado Mutual Ditch Company 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 September 30, 2011 and December 31, 2010, HCIC owned 91% of Mutual Ditch Company.
TWO RIVERS FARMS, LLC
The Company formed Two Rivers Farms, LLC (“Farms”) 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, Farms plans to lease water from the Mutual Ditch Company and other sources to produce agriculture crops.
Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farms, LLC and the wholly owned subsidiaries of Farms. F-1 contains 500 irrigable farmland acres and F-2, upon farmland preparation, which is expected in early 2012, will contain 1,500 irrigable farmland acres.
During the 2010 growing season, approximately 400 acres of land were farmed. The crops were wheat and feed corn.
During the 2011 season, Farms, through a lease with F-1 re-planted 10 acres of land with hay and alfalfa for production in 2012. The remaining F-1 acreage and F-2 acreage will be prepared in early 2012 for production in 212. Presently, the main targeted crop is organic alfalfa.
TWO RIVERS FARMS F-1, LLC
On January 21, 2011 the Company formed Two Rivers Farms F-1, LLC (“F-1” and previously registered with the Colorado Secretary of State as Two Rivers Farms T-1, LLC) to hold certain farming assets and as an entity to acquire debt for the Company’s expansion of the Farm Business. F-1 leases the farm land and farming assets back to Farms as the operator of farming activities.
TWO RIVERS FARMS F-2, LLC
On April 5, 2011 the Company formed Two Rivers Farms F-2, LLC (“F-2”) to hold certain farming assets and as an entity to acquire debt for the Company’s expansion of the Farm Business. F-2 leases the farm land and farming assets back to Farms as the operator of farming activities.
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.
DISCONTINUED OPERATIONS
Two Rivers is completing the sale or dissolution of its prior business entities including, Legendary Investment Group, LLC (“Legendary”) sold on September 30, 2010; Northsight, Inc. (“Northsight,” formerly Navidec Mortgage Holdings, Inc.), and Southie Developments (“Southie”). Together these entities are referred to as “Discontinued Operations.”
Interim Financial Information
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 September 30, 2011, results of operations for the three months and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010, 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Two Rivers and its subsidiaries, HCIC, Mutual Ditch Company, Farming, Water, and its Discontinued Operations. All significant inter-company balances and transactions have been eliminated in consolidation.
Non-controlling Interest
Non-controlling interest is recorded for the Mutual Ditch Company that are consolidated but are not wholly owned by the Company.
As of September 30, 2011 and December 31, 2010, respectively, the non-controlling members’ equity in the Mutual Ditch Company was $2,129,000 and $2,111,000.
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.
Concentration of Credit Risk
Financial instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, deposits, available for sale investments, 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 September 30, 2011, the Company had approximately $1,756,000 in an individual bank demand deposit, of which $250,000 is covered by FDIC insurance. Management believes the risk of loss to be low. All other bank accounts were under the FDIC insurance limit of $250,000.
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 September 30, 2011 there was an allowance of $240,000 against a long term mortgage balance of $240,000 and therefore this amount was removed from the Company’s accounting records. During the three months ended September 30, 2011 the debtor stopped paying on this receivable and our attorneys have been unable to make contact with the debtor to arrange payment terms. As of December 31, 2010, there was an allowance of $144,000 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 three and nine months ended September 30, 2011 and 2010, nor the year ended December 31, 2010.
Fair Value of Financial Instruments and Other Assets
The Company records fair value of monetary and nonmonetary instruments in accordance with FASB Accounting Standards Codification (“ASC”) 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 (as amended by Accounting Standards Update 2011-04), 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 appraisal performed by an engineering company 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.
During the three months ended September 30, 2011, the Company purchased 100% interest in the Orlando Reservoir No. 2, LLC, (“Orlando”) an unrelated entity. Management has commenced the appraisals necessary to assess the fair values of the tangible and intangible assets and liabilities, if any, assumed, and goodwill as of the acquisition dates. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the acquisition date. The valuations will be finalized within 6 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired and liabilities assumed may result in significant adjustments to the fair value of the net identifiable assets acquired and goodwill.
At the time of the acquisitions, the fair values of the assets acquired and liabilities assumed were preliminary determined to be the values based on a prior purchase and sale agreements between the members of Orlando and the Company. Management expects that the final appraisals of Orlando could result in changes, however it is not anticipated that the final appraisal amounts will necessitate a material write down of assets purchased.
As of September 30, 2011 the Company possesses water rights whose fair value will be measured at least on an annual basis. The Company possesses financial instruments of a short-term nature, such as cash, prepaid expenses, advances receivable, accounts payable accrued liabilities, and advances payable, whose fair value approximates carrying value due to their short maturities.
As of September 30, 2011 and December 31, 2010, the Company has long term debt. The carrying amount of this long term debt approximated fair value based upon the terms and conditions currently available to the Company in comparison to the terms and conditions of the existing debt.
Marketable Securities
The Company’s investment securities held in a brokerage account consist generally of covered puts and calls on precious metal ETFs on precious metals. The marketable securities are classified as available for sale and recorded at fair market value. Realized gains (losses) on marketable securities are recorded in the statements of operations. Unrealized gain/loss on the investments for the period was not significant.
Currently we only invest in highly liquid ETFs which have accurate and active markets. Therefore, the bid price is an effective measurement of the value.
Farm Product
As the growing season progresses, the Company invests in farm inputs. These inputs are capitalized, carried as current assets, and when the crop is sold, recognized as a cost of the crop sold. As of September 30, 2011 and 2010, $26,000 and $ -0-, respectively, has been recognized as Farm Product.
Discontinued Operations Assets Held for Sale
The Company carries its notes receivable at cost or loan balance, subject to management’s estimate of impairments. The book value of these financial instruments, after adjustment of the impairments, is representative of their fair values. On December 31, 2010, the Company had $227,000 invested in mortgages receivables, net of an allowance for bad debt of $144,000. During the nine months ended September 30, 2011, the Company collected $131,000 against these receivables. During the three months ended September 30, 2011, the Company’s management determined that the remaining mortgage receivable should be written off and removed from the books, which resulted in a $96,000 write down. This write down decision was made due to the debtor halting payments and the inability to reach the debtor.
The Company owns property it acquired through foreclosing proceedings. At December 31, 2010, the property was held for sale. During the nine months ended September 30, 2011, this property was sold for $23,000, which caused an additional $7,000 loss.
|
Sept 30, 2011
|
Dec 31, 2010
|
|||||||
|
Real estate owned
|
$ | - | 123,000 | |||||
|
Allowance for:
|
||||||||
|
Real Estate owned – depreciation
|
- | - | ||||||
|
Real Estate owned – impairments
|
- | (93,000 | ) | |||||
|
Total
|
$ | - | 30,000 | |||||
Intangibles
Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in the Mutual Ditch Company. This intangible asset will not be amortized because it has an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado. Once per year, or more often if certain evidence is present that would indicate impairment is possible, 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.
Options on Land and water shares
Upon purchasing water shares and land, or options thereon, the value is recorded at purchase price. Management evaluates the carrying value, and if the carrying value is in excess of fair market value, 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.
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.
Convertible Debt
During the nine months ended September 30, 2011, the Company closed on $2,000,000 in convertible notes (“Series A”). These notes bear interest at 5% plus 1/3 of the crop profit that was financed through the convertible notes. The convertible debt has a conversion feature to convert at each $2.50 share of debt into one share of the Company’s common stock. In accordance with applicable accounting guidance, the Company valued the convertible notes at its carrying value which approximated fair value since at the time of issue there was no beneficial conversion feature with the current price of the Company’s stock being less than the conversion price. Further, the convertible option of the note cannot be separated nor valued from the note.
In June 2011, the Company offered a $5,332,000 convertible debt offering (“Series B”). This offering was closed at the end of August, 2011. This offering financed the land, water rights, and irrigation for F-2. The terms of this debt is interest at 6% per annum and 10% of the net-crop revenue of production of farm product from land owned by F-2. The Noteholders have the right to convert debt into Company common stock at $2.50/share. The note is due June 30, 2014. When the debt was issued and closed, the Company’s stock was traded for less than the conversion, so no additional beneficial interest was recognized. Further, the convertible option of the note cannot be separated nor valued from the note. In conjunction with the Series B, the Company issued 2,132,800 warrants to the debt holders that can be converted into the Company shares at $2.50 through December 31, 2012. It also issued 171,000 $2.50/share warrants to three broker-dealers with an expiration of September 30, 2014. The fair value of these warrants is $149,000.
Revenue Recognition
Farm Revenues
Revenues from farming operations are recognized when sold into the market. All direct expenses related to farming operations are capitalized as inventory and recognized as a direct cost of sale upon the sale of the crops.
Water Revenues
The Company recognizes revenues from water leases when the water is delivered and invoiced.
Stock Based Compensation
Beginning January 1, 2006, the Company adopted the provisions of ASC 718, Compensation – Stock Compensation 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.
Net Income (Loss) per Share
Basic net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income 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 4,615,474 Restrictive Stock Units (“RSUs”), 1,727,866 options and 100,000 warrants at September 30, 2011, has not been included in the determination of diluted earnings per share since they would be anti-dilutive.
Recently issued Accounting Pronouncements
There were various accounting standards and interpretations issued in the nine months ended September 30, 2011, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.
NOTE 3 – NOTES PAYABLE
Beginning on September 17, 2009, Two Rivers began acquiring shares in the Mutual Ditch Company and related land from a Mutual Ditch Company shareholder. As part of these acquisitions, many of the sellers financed notes payable with Two Rivers and HCIC. As of December 31, 2010, these loans totaled $9,126,000. As of September 30, 2011, these loans totaled $7,401,000. The notes carry interest at 6% per annum, interest payable monthly, the principal amounts due at various dates from September 1, 2012 through March 31, 2013, and are collateralized by the Mutual Ditch Company shares and land.
As of September 30, 2011, of the $7,401,000 in seller carry back notes, $2,114,000 provides the holders the right to convert some or all of the amounts owing into the Company’s stock at $1/share to $1.25/share. The holder can convert anytime until the note is paid. These notes are due March 31, 2013 and September 30, 2013 with 6% annual interest, with the interest paid monthly.
During the nine months ended September 30, 2011, the Company exchanged $1,575,000 in Mutual Ditch Company debt into 722,222 shares of the Company’s stock, a cash payment of $37,500, and $37,500 in an unsecured note due September 30, 2011. An expense due to loss on extinguishment of note payable of $272,000 was recognized due to the difference between the stock price conversion and the fair market value of the Company’s common stock.
During the nine months ended September 30, 2011, the Company offered holders of HCIC notes the option of an early payoff in exchange for a discount on the face amount of the note. A total of $189,000 of notes was retired early and a gain on forgiveness of the HCIC notes of $84,000 was recognized and is netted against the loss of extinguishment of note payables in the statement of operations.
On January 28, 2011, the Company purchased water storage and direct flow from the Orlando Reservoir No. 2 Company, LLC (“Orlando”) for $3,100,000, which consisted of a cash payment of $100,000 and a seller financed note payable of $3,000,000. The note was due January 28, 2014. Interest is to be paid based on 50% of the Company’s gross profits received from all of the Company’s crop operations payment or sales where the water assets from Orlando are used and $40 per acre foot of water used. The Company is accruing interest at 5% per annum until a better estimate can be made on the payments to be made to Orlando. The holder of the note has an option to convert the amount of all outstanding principal and accrued and unpaid interest into common stock of Two Rivers at the conversion price of $4.00 per share.
In July 2011, the Company and Orlando renegotiated the purchase of Orlando for 650,000 shares of the Company stock, $1,412,500 cash payment and a seller carryback note of $187,500. The Company shares were valued at $1,557,000.
In February 2011 the Company offered a $2,000,000 Series A convertible debt offering. This offering was closed at the end of February, 2011. This offering financed the land, water rights, irrigation, and farm equipment for F-1. The terms of this debt is interest at 6% per annum, one-third of the crop profit and the right to convert debt into Company common stock at $2.50/share. The note is due March 31, 2014. When the debt was issued and closed, the Company’s stock was trading for less than the conversion, so no additional beneficial interest was recognized. Further, the one-third of crop profit will be recognized as a interest expense upon the sale of the crop.
In June, 2011, the Company offered a $5,332,000 Series B convertible debt offering. This offering was closed at the end of August, 2011. This offering financed the land, water rights, and irrigation for F-2. The terms of this debt is interest at 6% per annum and 10% of the net-crop revenue of production of farm product from land owned by F-2. The Noteholders have the right to convert debt into Company common stock at $2.50/share. The note is due June 30, 2014. When the debt was issued and closed, the Company’s stock was trading for less than the conversion, so no additional beneficial interest was recognized.
Further, the convertible option of the note cannot be separated nor valued from the note. In conjunction with the Series B, the Company issued 2,132,800 warrants to the debt holders that can be converted into the Company shares at $2.50 through December 31, 2012. The Company also issued 171,000 $2.50/share warrants to three broker-dealers with an expiration of September 30, 2014. The fair value of the warrants issued was computed at $1,675,000 for the debt holder warrants and $149,000 for the broker dealer warrants, for a total of $1,824,000. This amount was recorded as a discount on the note and is amortized over the life of the note to interest expense utilizing the effective-interest method.
Below is a summary of the Company’s long term debt:
|
Note
|
Sept 30, 2011 principal balance
|
Sept 30, 2011 accrued interest
|
Interest rate
|
Security
|
|||||||||
|
Mutual Ditch seller carry back
|
$ | 7,401,000 | $ | - | 6 | % |
Shares in the Mutual Ditch Company
|
||||||
|
Orlando purchase
|
187,500 | 600 |
Various
|
188 acres of land
|
|||||||||
|
Convertible debt Series A
|
2,000,000 | 61,000 | 6 | % |
F-1 assets
|
||||||||
|
Convertible debt Series B
|
5,332,000 | 44,000 | 6 | % |
F-2 assets
|
||||||||
|
Equipment loans
|
139,000 | - | 5 - 8 | % |
Specific equipment
|
||||||||
|
Total
|
$ | 15,059,500 | $ | 105,600 | |||||||||
|
Less: Current portion
|
(24,000 | ) | |||||||||||
|
Less: Discount on Series A,B
|
(1,675,000 | ) | |||||||||||
|
Long Term portion
|
$ | 13,360,500 | |||||||||||
NOTE 4 – INFORMATION ON BUSINESS SEGMENTS
We organize our business segments based on the nature of the products activities. We primarily focus on the Farming and Water Business with Two Rivers Water Company as the parent company and Two Rivers Farms LLC (and its subsidiaries, Two Rivers Farms F-1, LLC and Two Rivers Farms F-2, LLC) and Two Rivers Waters LLC as subsidiaries.
Two Rivers Water Company also holds its legacy assets that include a mortgage notes receivable. Prior real estate activity is held in Northsight and Northsight’s subsidiaries, Southie and Legendary. The summary of the legacy activity and assets is contained in the category “Discontinued Operations.”
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 nine months ended Sept 30, 2011 |
For the nine months ended Sept 30, 2010
|
||||||||||||||||||||
|
Parent
|
Farms
|
Water
|
Discon-
tinued
Ops
|
Total
|
Parent
|
Farms
|
Water
|
Discon-
tinued
Ops
|
Total
|
||||||||||||
|
Revenue
|
|||||||||||||||||||||
|
Assessments
|
$
|
-
|
-
|
72
|
-
|
72
|
-
|
-
|
-
|
-
|
-
|
||||||||||
|
Other & misc.
|
-
|
1
|
-
|
-
|
1
|
-
|
18
|
477
|
-
|
495
|
|||||||||||
|
Gross Profit
|
-
|
1
|
72
|
-
|
73
|
-
|
18
|
477
|
-
|
495
|
|||||||||||
|
Total Operating Expenses
|
(4,059)
|
(483)
|
(299)
|
-
|
(4,841)
|
(1,912)
|
(105)
|
(899)
|
-
|
(2,916)
|
|||||||||||
|
Total Other Income/(Expense)
|
3
|
238
|
(689)
|
-
|
(448)
|
(76)
|
(1)
|
(281)
|
-
|
(358)
|
|||||||||||
|
Net (Loss) Income from continuing operations before income taxes
|
(4,056)
|
(244)
|
(916)
|
-
|
(5,216)
|
(1,988)
|
(88)
|
(703)
|
-
|
(2,779)
|
|||||||||||
|
Income Taxes (Expense)/Credit
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Net Income (Loss) from continuing operations
|
(4,056)
|
(244)
|
(916)
|
-
|
(5,216)
|
(1,988)
|
(88)
|
(703)
|
-
|
(2,779)
|
|||||||||||
|
Discontinued operations:
|
|||||||||||||||||||||
|
(Loss) gain from operations of discontinued real estate and mortgage business
|
-
|
-
|
-
|
(131)
|
(131)
|
13
|
-
|
-
|
(685)
|
(672)
|
|||||||||||
|
Income tax benefit
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||
|
Loss on discontinued operations
|
-
|
-
|
-
|
(131)
|
(131)
|
13
|
-
|
-
|
(685)
|
(672)
|
|||||||||||
|
Non-controlling interest
|
-
|
-
|
(17)
|
-
|
(17)
|
-
|
-
|
(9)
|
-
|
(9)
|
|||||||||||
|
Net (Loss) Income
|
$
|
(4,056)
|
(244)
|
(933)
|
(131)
|
(5,364)
|
(1,975)
|
(88)
|
(712)
|
(685)
|
(3,460)
|
||||||||||
|
Segment assets
|
$
|
2,876
|
5,542
|
26,298
|
6
|
34,722
|
14,888
|
242
|
12,561
|
514
|
28,205
|
||||||||||
NOTE 5 - EQUITY TRANSACTIONS
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 CEO ability to grant Rights to non-board members and non-executives of the Company.
A summary of the Two Rivers option plan is as follows:
|
Shares
|
Weighted Average
Exercise Price
|
|||||||
|
Outstanding, December 31, 2010
|
1,745,562 | $ | 1.37 | |||||
|
Granted
|
434,666 | $ | 1.44 | |||||
|
Cancelled
|
- | - | ||||||
|
Expired
|
- | - | ||||||
|
Exercised
|
452,362 | $ | 1.25 | |||||
|
Outstanding, Sept 30, 2011
|
1,727,866 | $ | 1.41 | |||||
|
Options Exercisable , Sept 30, 2011
|
1,667,866 | $ | 1.26 | |||||
During the year ended December 31, 2010, $72,000 in option and warrant expense was recognized. During the nine months ended September 30, 2011, $600,501 in option and warrant expense was recognized, and $91,000 options previously issued and recorded at fair value was recorded as cost of debt and accreted to interest expense.
During the year ended December 31, 2010, the Company converted 1,905,948 of its stock options to RSUs. Under ASC 718, a computation was made of the fair value of the options and the fair value of the RSUs. Further, during the year ended December 31, 2010, an additional 3,807,140 RSUs were granted to the Company’s key employees. The expense recognized for the year ended December 31, 2010 is $4,841,000. During the nine months ended September 30, 2011, the expense recognized was $2,102,000. The remaining unamortized amount, including stock option expense, is $4,012,000. Upon the change of RSU vesting schedules, the valuation of the RSUs were recomputed and amortized in 2010. The RSUs vest over a three year period, beginning in January, 2011.
During the nine months ended September 30, 2011, the Company issued 434,666 options with a $1.25/share strike price and vesting immediately to a consultant as compensation for the consultant’s work in the F-1 and F-2 convertible debt offering and closing. Using the black scholes method, the fair value of these options is estimated to be $791,091. Since these options were issued in conjunction with the successful debt placement, the fair value is being amortized over the three-year life of the convertible note, or $47,000 per quarter and is recognized as interest expense.
A summary of the Two Rivers RSU plan is as follows:
|
Shares
|
Exercise Price
|
|||||||
|
Outstanding, January 1, 2010
|
- | |||||||
|
Granted
|
5,713,088 | $ | - | |||||
|
Cancelled
|
- | |||||||
|
Expired
|
- | |||||||
|
Exercised
|
- | |||||||
|
Outstanding, December 31, 2010
|
5,713,088 | |||||||
|
Granted
|
50,000 | |||||||
|
Cancelled
|
- | |||||||
|
Expired
|
- | |||||||
|
Exercised
|
1,147,614 | $ | - | |||||
|
Outstanding, Sept 30, 2011
|
4,615,474 | $ | - | |||||
|
RSUs Exercisable , Sept 30, 2011
|
- | - | ||||||
Warrants
As of September 30, 2011, the Company has the following warrants outstanding:
|
No. of Warrants
|
Exercise Price Per Share
|
Expiration Date
|
|||||
| 100,000 | $ | 1.00 |
December 31, 2011
|
||||
| 2,132,800 | $ | 2.50 |
December 31, 2012
|
||||
| 170,624 | $ | 2.50 |
September 29, 2014
|
||||
| 750,000 | $ | 2.00 |
May 3, 2016
|
||||
During the nine months ended September 30, 2011, 50,000 warrants were exercised at $1/share with net proceeds of $50,000 to the Company.
NOTE 6 – 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, 2011.
The assets to be liquidated are presented at the lower of cost or current market values, as of September 30, 2011 and December 31, 2010 and are detailed as follows:
|
(in thousands)
|
Sept 30, 2011
|
Dec 31, 2010
|
||||||
|
Mortgages receivable
|
$ | 240 | $ | 373 | ||||
|
Other real estate owned
|
- | 123 | ||||||
|
Subtotal
|
240 | 496 | ||||||
|
Less allowances and depreciation
|
(240 | ) | (237 | ) | ||||
|
Net book value of property to sell
|
- | 259 | ||||||
|
Less amounts owed on real estate to be sold
|
- | - | ||||||
|
Net projected proceeds from discontinued operations assets held for sale
|
$ | - | $ | 259 | ||||
Within the discontinued operations, during the nine months ended September 30, 2011 and 2010, the Company recognized a loss on disposal of real estate of $27,000 and $81,000, respectively.
Within the discontinued operations, during the nine months ended September 30, 2011 and 2010, the Company had $0 and $(5,000) in revenue net of $44,000 loss on REO sales, respectively.
Within the discontinued operations, during the three months ended September 30, 2011 and 2010, the Company recognized a loss on disposal of real estate of $0 and $38,000, respectively.
Within the discontinued operations, during the three months ended September 30, 2011 and 2010, the Company had $0 and $1,000 in revenue (less a $38,000 on REO sales), respectively.
Management estimates that the above assets to be sold are stated at current fair market value. When these assets are sold, the Company expects no 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 subsidiary, Northsight.
Please refer to the Company’s December 31, 2010 10K filing. There have been no material changes since the 10K filing.
NOTE 8 – SUBSEQUENT EVENTS
This section includes all subsequent events through the date the financial statements were available to be issued.
Subsequent to September 30, 2011 and through November 7, 2011, the Company had the following material events:
|
-
|
The Company held its Annual Shareholder meeting on November 7, 2011. At this meeting the Company’s shareholders approved the following:
|
|
o
|
re-election of the existing board members;
|
|
o
|
appointment of Eide Bailly as the Company’s independent auditors, and
|
|
o
|
approval of the 2011 Long Term Stock Plan.
|
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.
Overview
Two Rivers Water Company acquires and develops high yield irrigated farmland and the associated water rights in the Huerfano and Cucharas two river basin in Southern Colorado.
The Company owns a 91% interest in the Huerfano Cucharas Irrigation Company which was purchased in 2010. The Company also purchased the Orlando Reservoir and Butte Valley water rights in February 2011. The Company currently has the right to store 15,000 acre-feet and in excess of 70,000 acre-feet of water annually in its reservoirs when they are fully restored. The Company also has the right to divert in excess of 50 cubic feet per second of stream flow which historically yields 15,000 acre-feet of water annually.
The Company currently owns approximately 4,700 gross acres, which in 2012 should provide cash crops from approximately 3,000 acres of high yield irrigated farmland. Each acre of irrigated farmland is capable of producing the equivalent of 200+ bushels of corn or 6 tons of alfalfa per acre. The Company expects to acquire and develop in excess of 25,000 acres of high yield irrigated farmland within the Huerfano Cucharas river basin within the next 5 years.
The Company expects to acquire and develop the right to divert and store an additional 55,000 acre-feet of water within the next five years. The Company has several economic advantages within the Huerfano Cucharas river basin as a result of its ownership and control of its water storage facilities and diversion canals. The Company’s water assets provide an economic advantage compared to other water assets which are tributary to the Arkansas River as a result of the river basin’s elevation and proximity to Pueblo, Colorado.
Two Rivers operates two core businesses, organic crop production from high yield irrigated farmland and water distribution to municipal markets in Huerfano County and the Front Range of Colorado. The Company’s initial crop production will consist of organic premium to supreme alfalfa hay and exchange traded grains. The Company also expects to produce organic vegetable and fruit crops when supply contracts are secured. The Company expects to have excess water resources it acquired for agricultural purposes to also be available for municipal water users through Rotational Farm Fallowing. Rotational Farm Fallowing is an agricultural best practice whereby portions of farm acreage are fallowed on a rotational basis each year and thereby allowing the associated water to be utilized for municipal and industrial uses.
The Company is expanding operations through various funding mechanisms which include debt, convertible debt and equity capital. From inception to date, the Company has raised over $30 million in expansion capital.
The Company is developing a business model whereby it acquires and develops agricultural assets proximate to municipal water use, thereby creating a profitable synergistic relationship between crop production and water use in other arid western regions of the United States. The Company believes its business model can be implemented in other areas of the arid West and thereby remove the tension and conflict created by the traditional “buy and dry” practices.
Two Rivers maintains a website at www.2riverswater.com, which is not incorporated in, and is not a part of, this report.
Results of Operations
The majority of the Company’s revenue is generated from farm product. Harvesting of the farm product mainly occurs in the third and fourth quarter of each calendar year. Costs associated with the growing of the farm product are capitalized as inventory until the crop is harvested and sold. The cost of the farm product is carried at lower of cost or market.
For the three Months Ended September 30, 2011 compared to the three Months Ended September 30, 2010
During the three months ended September 30, 2011, we recognized revenues from continuing operations of $25,000 compared to $34,000 in revenues from continuing operations during the three months ended September 30, 2010. Revenues were a result of Mutual Ditch Company assessments not paid by the Company. Revenues paid by the Company have been eliminated in consolidation.
Within our discontinued operations, during the three months ended September 30, 2011 and 2010, we recognized revenues of $ -0- compared to $1,000 (not including a loss of $38,000 on sale of property), and losses of $100,000 and $150,000, respectively. The decrease of revenue and losses in our discontinued operations is a result of our company’s new focus on the farming and water business and the liquidation of our legacy mortgage and real estate business.
Operating expenses from continuing operations during the three months ended September 30, 2011 and 2010 were $1,956,000 and $808,000, respectively. The increase of $1,148,000 is primarily due to a $297,000 increase in non-cash expense of granting of options, warrants and restrictive stock units, an increase of $173,000 spent on investor relations, an increase in payroll of $256,000 and a $227,000 increase in consulting expense, mostly from water engineering. Management expects the expenses will continue to increase as we expand our business in irrigated farming and water segments.
For continuing operations, during the three months ended September 30, 2011 and 2010, we recognized a net loss of $1,816,000 and $1,193,000, respectively. The increased loss of $623,000 is due to an increase of stock based compensation expense and our expansion of the farming and water business.
For the Nine Months Ended September 30, 2011 compared to the Nine Months Ended September 30, 2010
During the nine months ended September 30, 2011, we recognized revenues from continuing operations of $73,000 compared to $83,000 in revenues from continuing operations during the nine months ended September 30, 2010. Revenues were a result of Mutual Ditch Company assessments not paid by the Company. Revenues paid by the Company have been eliminated in consolidation.
Within our discontinued operations, during the nine months ended September 30, 2011 and 2010 we recognized revenues of $ -0- compared to ($5,000) (net of $81,000 loss from REO sales), respectively. The increase of $5,000 in our discontinued operations is a result of our company’s new focus on the farming and water business and the liquidation of our legacy mortgage and real estate business.
Operating expenses from continuing operations during the nine months ended September 30, 2011 and 2010 were $4,842,000 and $2,496,000, respectively. The increase of $2,346,000 is primarily due to a $251,000 increase in investor relations expense, a $333,000 increase in payroll, a $370,000 increase in expenditures on consultants (mostly water engineers) and an increase of $1,203,000 in the non-cash expense of granting of options, warrants and restrictive stock units .
For continuing operations, during the nine months ended September 30, 2011 and 2010, we recognized a net loss of $5,217,000 and $2,821,000, respectively. The increased loss of $2,396,000 is due from an increase of stock based compensation expense and our rapid expansion of the farming and water business.
LIQUIDITY
From the Company’s inception through September 30, 2011, we have funded our operations primarily from the following sources:
|
-
|
Equity proceeds through private placements of Two Rivers securities and convertible debt;
|
|
-
|
Revenue generated from operations;
|
|
-
|
Loans and lines of credit (none currently available);
|
|
-
|
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 September 30, 2011, the Company had cash and cash equivalents of $1,941,000. Cash flow consumed by our operating activities totaled $2,569,000 for the nine months ended September 30, 2011 compared to operating activities consuming $1,429,000 for the nine months ended September 30, 2010.
As of September 30, 2011, the Company had $2,117,000 in current assets and $758,000 in current liabilities. The Company intends to continue with its strategy of expanding its farming and water business. Capital for this expansion and support of operations is generated from private placement of its convertible debt offerings.
Cash flows used by our investing activities for the nine months ended September 30, 2011 were $2,030,000 compared to $6,247,000 for the nine months ended September 30, 2010. The decrease is primarily due to the completion of our purchases of the shares in the Mutual Ditch Company. The increases is derived from investments in farming equipment, farming irrigation and the Orlando water rights, water storage and land purchase.
Net cash proceeds from financing activities was $5,895,000 for the nine months ended September 30, 2011 compared to total proceeds of cash of $8,200,000 for the nine months ended September 30, 2010. During the nine months ended September 30, 2011 we completed our convertible debt offering of $2,000,000 and our Series B convertible debt offering of $5,332,000. In addition, we retired selected debt and had $613,000 in warrants and options exercise.
During the nine months ended September 30, 2010, we generated $6,951,000 in cash from Mutual Ditch Company seller financing and $2,204,000 from our private placement. We also retired bank debt against real estate owned by $950,000.
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. 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.
REVENUE RECOGNITION
The Company follows very specific and detailed guidelines in measuring revenue. 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.
GOODWILL AND INTANGIBLE ASSETS
During the year ended 2010 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.
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 September 30, 2011, as described below, it has determined that there is no material market risk exposure to the Company's consolidated financial position, results of operations, or cash flows through September 30, 2011. Two Rivers does not enter into derivatives or other financial instruments for trading or speculative purposes.
INTEREST RATE RISK
At September 30, 2011, 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 year, Two Rivers examines all of its 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 effect of accumulated depreciation. Management examines market valuations and, if an additional impairment is necessary for lower of cost or market, an impairment charge is recorded.
INVESTMENT RISK
From time to time Two Rivers has made investments in available for sale investments in ETFs and commodities 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, future inflation will have a material negative impact on its future operations.
We are exposed to the impact of interest rate changes and change in the market values of our farming properties and water assets. Based on our market risk sensitive instruments outstanding as of September 30, 2011, 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. We do take cover positions in certain commodities, mostly through ETFs.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation as of the end of the quarter ended September 30, 2011, our Chief Financial Officer has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are ineffective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, specifically the Chief Executive Officer and Chief Financial Officer and board, as appropriate to allow timely decisions regarding required disclosures.
As required by SEC Rule 15d-15(b), our Chief Executive 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 September 30, 2011. Based on the foregoing evaluation, our Chief Executive Officer has concluded and determined that our internal controls over financial reporting, and therefore our disclosure controls and procedures, are ineffective in timely alerting him to material information required to be included in our periodic SEC filings and does notensure that information required to be disclosed in our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosures.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
As previously disclosed in our past filings with the SEC, management identified material weaknesses in our internal control over financial reporting for the years ended December 31, 2010 and 2009. The weaknesses that the Company previously disclosed related to (a) our lack of adequate processes for monitoring our financial reporting and accounting processes and our failure to conduct a comprehensive review of our account balances and transactions; (b) our lack of appropriate processes and procedures, including inadequate segregation of duties; and (c) our lack of appropriate processes and procedures in relation to the timely review of material documents and transactions for accounting and disclosure purposes. In order to remediate these material weaknesses management plans to retain accounting and financial consultants later in 2011 to assist in the design and implementation of processes and controls to ensure that (a) all material transactions are properly recorded, reviewed and approved; (b) all significant accounts are reconciled on a timely basis; (c) duties are properly segregated; and, (d) complex accounting issues are properly evaluated and accounted for in accordance with GAAP.
We believe that while not all of the previously identified material weaknesses are fully remediated, our processes are improving and we anticipate making additional improvements in our internal control over financial reporting for the remainder of fiscal year 2011. Additionally, in October 2011, the Company engaged an independent internal control consultant to review the Company’s internal controls over financial transactions and reporting However, due to our size it will be unlikely we can justify the hiring of the necessary staff to implement controls required to fully satisfy COSO standards.
ITEM 1. LEGAL PROCEEDINGS
Please refer to the Company’s December 31, 2010 10K filing.
Not applicable to Smaller Reporting Issuers.
During the period of July 1, 2011 through September 30, 2011, the Company made the following issuances of its unregistered securities.
During the nine months ended September 30, 2011, the Company exchanged 722,222 shares of its common stock for the retirement of $1,500,000 of Mutual Ditch Company seller financing. The Company issued 650,000 shares of its common stock as part payment for the purchase of the Orlando Reservoir No. 2, LLC.
During the nine months ended, the Company issued 2,132,800 warrants with a $2.50 exercise price, expiring December 31, 2012; 170,624 warrants with a $2.50 exercise price expiring September 1, 2014, and 750,000 warrants with a $2.00 exercise price expiring May 3, 2016;
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”) and Regulation D promulgated thereunder. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
The following is a complete list of exhibits filed as part of this Form 10Q. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
|
Number
|
Description
|
|
|
31.1
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
|
Filed Herewith
|
|
31.2
|
Certification of Principal Financial Officer pursuant to the Section 302 of the Sarbanes-Oxley Act
|
Filed Herewith
|
|
32.1
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
|
Filed Herewith
|
|
32.2
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
|
Filed Herewith
|
|
101.INS
|
XBRL Instance Document
|
Filed Herewith
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document (1)
|
Filed Herewith
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document (1)
|
Filed Herewith
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document (1)
|
Filed Herewith
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document (1)
|
Filed Herewith
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document (1)
|
Filed Herewith
|
____________
|
(1)
|
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
|
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.
|
TWO RIVERS WATER COMPANY (Registrant)
|
|
|
Dated: November 8, 2011
|
By: /s/ John McKowen
|
|
Chief Executive Officer & Chairman of the Board
|
|
|
By: /s/ Wayne Harding
|
|
|
Chief Financial Officer & Principal Accounting Officer
|