Attached files
| file | filename |
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| EX-32.1 - TWO RIVERS WATER & FARMING Co | ex32-1.htm |
| EX-31.1 - TWO RIVERS WATER & FARMING Co | ex31-1.htm |
UNIted States
SeCURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2018 | ||
| 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 & Farming Company
(Exact Name of Registrant as Specified in Its Charter)
| Colorado | 13-4228144 | |
| (State
or Other Jurisdiction or Incorporation or Organization) |
(I.R.S.
Employer Identification No.) | |
3025
S Parker Rd. Aurora, Colorado |
80014 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (303) 222-1000
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 August 13, 2018 there were 34,729,967 shares outstanding of the registrant’s Common Stock.
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 |
| Item 4. | Controls and Procedures | 25 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 27 |
| Item 1A. | Risk Factors | 28 |
| Item 6. | Exhibits | 28 |
| SIGNATURE | 29 | |
| 2 |
| 3 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except for number of shares)
| June 30, 2018 (unaudited) | December 31, 2017 (Derived from Audit) | |||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 36 | $ | 14 | ||||
| Accounts receivable, net | 5 | 5 | ||||||
| Accounts receivable, related party | - | 19 | ||||||
| Deposits and other current assets | 66 | 32 | ||||||
| Total Current Assets | 107 | 70 | ||||||
| Long Term Assets: | ||||||||
| Property, equipment and software, net | 30 | 160 | ||||||
| Land | 3,418 | 3,505 | ||||||
| Water assets | 24,853 | 25,016 | ||||||
| Greenhouse & infrastructure, net | - | 5,955 | ||||||
| Construction in progress | - | 3,361 | ||||||
| Investment in GCP1 | 2,405 | - | ||||||
| Other long term assets | 89 | 85 | ||||||
| Total Long Term Assets | 30,795 | 38,082 | ||||||
| TOTAL ASSETS | $ | 30,902 | $ | 38,152 | ||||
| LIABILITIES & STOCKHOLDERS’ EQUITY: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,118 | $ | 1,553 | ||||
| Accrued liabilities | 3,208 | 1,837 | ||||||
| Current portion of notes payable, net of discount | 8,139 | 17,419 | ||||||
| Preferred dividend payable | 4,965 | 3,968 | ||||||
| Total Current Liabilities | 17,430 | 24,777 | ||||||
| Notes Payable, net of current portion | 1,174 | 1,238 | ||||||
| Total Liabilities | 18,604 | 26,015 | ||||||
| Commitments & Contingencies (Notes 4, 7, 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Common stock, $0.001 par value, 200,000,000 shares authorized, 33,663,192 shares issued and outstanding at June 30, 2018 and 32,749,920 shares issued and outstanding at December 31, 2017 | 34 | 34 | ||||||
| Preferred shares, $0.001 par value, 5,000,000 shares authorized, 64,935 shares issued and outstanding at March 31, 2018 December 31, 2017. | 252 | 252 | ||||||
| Additional paid-in capital | 77,970 | 77,267 | ||||||
| Accumulated (deficit) | (88,469 | ) | (97,168 | ) | ||||
| Total Two Rivers Water Company Shareholders’ Equity | (10,213 | ) | (19,615 | ) | ||||
| Noncontrolling interest in subsidiaries | 22,511 | 31,752 | ||||||
| Total Stockholders’ Equity | 12,298 | 12,137 | ||||||
| TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 30,902 | $ | 38,152 | ||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
| 4 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In Thousands, except Per Share Data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Revenue | ||||||||||||||||
| Leasing - Greenhous | $ | - | $ | 1,323 | $ | - | $ | 1,859 | ||||||||
| Other | 10 | 18 | 17 | 24 | ||||||||||||
| Total Revenue | 10 | 1,341 | 17 | 1,883 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| General and administrative | 489 | 177 | 1,166 | 576 | ||||||||||||
| Depreciation and amortization | 15 | 120 | 58 | 249 | ||||||||||||
| Total operating expenses | 504 | 297 | 1,224 | 825 | ||||||||||||
| Profit (Loss) from Operations | (494 | ) | 1,044 | (1,207 | ) | 1,058 | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (222 | ) | (697 | ) | (519 | ) | (1,187 | ) | ||||||||
| Warrant expense | (11 | ) | - | (11 | ) | - | ||||||||||
| Gain (loss) on disposal of assets and intangibles | (3 | ) | 152 | 77 | 80 | |||||||||||
| Other income (expense) | (7 | ) | 11 | 11 | 9 | |||||||||||
| Gain on deconsolidation of GrowCo | 12,773 | - | 12,773 | - | ||||||||||||
| Loss on investment in GrowCo | (617 | ) | - | (617 | ) | - | ||||||||||
| Total other income (expense) | 11,913 | (534 | ) | 11,714 | (1,098 | ) | ||||||||||
| Net Profit (Loss) from Continuing Operations before Taxes | 11,923 | 510 | 10,507 | (40 | ) | |||||||||||
| Income tax (provision) benefit | - | - | - | - | ||||||||||||
| Net Profit (Loss) from Continuing Operations After Taxes | 11,419 | 510 | 10,507 | (40 | ) | |||||||||||
| Net (Loss) from Discontinued Operations | - | (534 | ) | (810 | ) | (1,081 | ) | |||||||||
| Net Profit (Loss) before Preferred Dividends and Non-Controlling Interest | 11,419 | (24 | ) | 9,697 | (1,121 | ) | ||||||||||
| Preferred distributions | (498 | ) | (519 | ) | (996 | ) | (1,195 | ) | ||||||||
| Net loss attributable to noncontrolling interest | (3 | ) | 85 | - | 143 | |||||||||||
| Net Profit (Loss) Attributable to Common Shareholders | $ | 10,918 | $ | (458 | ) | $ | 8,701 | $ | (2,173 | ) | ||||||
| Loss Per Common Share - Basic: | $ | 0.33 | $ | (0.01 | ) | $ | 0.26 | $ | (0.07 | ) | ||||||
| Loss Per Common Share - Dilutive: | $ | 0.33 | $ | (0.01 | ) | $ | 0.26 | $ | (0.07 | ) | ||||||
| Weighted Average Shares Outstanding: | ||||||||||||||||
| Basic | 33,394 | 31,775 | 33,165 | 30,485 | ||||||||||||
| Dilutive | 33,512 | 31,775 | 33,283 | 30,485 | ||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these statements.
| 5 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
| Six Months Ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss), before NCI | $ | 8,701 | $ | (2,316 | ) | |||
| Net loss from discontinued operations | 810 | - | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation & Amortization | 58 | 250 | ||||||
| Accretion of debt discount | 131 | 169 | ||||||
| Loss from debt extinguishment | - | 46 | ||||||
| Stock Option and Warrant expense | 745 | 194 | ||||||
| Gain on deconsolidation | (12,773 | ) | - | |||||
| Loss on investment in GrowCo | 617 | - | ||||||
| Loss (Gain) on write down of assets related to property and equipment | - | 588 | ||||||
| Loss (Gain) from disposal of fixed assets | (80 | ) | - | |||||
| Net change in operating assets and liabilities: | ||||||||
| Decrease in accounts receivable | - | 32 | ||||||
| Decrease (increase) in accounts receivable, related party | 2 | (1,771 | ) | |||||
| (Increase) in deposits, prepaid expenses and other assets | (28 | ) | (171 | ) | ||||
| Increase (decrease) in accounts payable | 97 | (723 | ) | |||||
| Increase in distribution payable to preferred shareholders | 997 | 1,195 | ||||||
| Increase in accrued liabilities and other | 147 | 465 | ||||||
| Net Cash Used in Operating Activities | (576 | ) | (2,042 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Sale of property and equipment | 60 | 720 | ||||||
| Investment in water assets | (80 | ) | - | |||||
| Construction in progress | - | (376 | ) | |||||
| Net Cash Used in Investing Activities | (20 | ) | 344 | |||||
| Cash Flows from Financing Activities: | ||||||||
| Preferred membership offerings | - | 253 | ||||||
| Proceeds from warrant exercises | - | 208 | ||||||
| Proceeds from debt | 1,026 | 2,034 | ||||||
| Payment on notes payable | (408 | ) | (411 | ) | ||||
| Net Cash Provided by Financing Activities | 618 | 2,084 | ||||||
| Net Increase in Cash & Cash Equivalents | 22 | 386 | ||||||
| Beginning Cash & Cash Equivalents | 14 | 150 | ||||||
| Ending Cash & Cash Equivalents | $ | 36 | $ | 536 | ||||
Continued on next page
| 6 |
Continued from previous page
| Six Months Ended June 30, | ||||||||
| 2018 | 2017 | |||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest, net of $-0- and $131 respectively capitalized into CIP | $ | 110 | $ | 426 | ||||
| Shares issued in exchange for debt | $ | - | $ | 238 | ||||
| Conversion of debt, preferred shares into Two Rivers common stock | $ | 50 | $ | - | ||||
| Land Exchanged for debt | $ | 108 | $ | 1,606 | ||||
Conversion of TR Cap into Two Rivers common shares | $ | - | $ | 70 | ||||
| Conversion of accounts payable into Water Redev preferred shares | $ | - | $ | 100 | ||||
The
accompanying notes to condensed consolidated financial statements are an integral part of these statements.
| 7 |
TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2018 and June 30, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS
Unless the context requires otherwise, references in these notes to “Two Rivers,” the “Company,” “we,” “our,” “us” and similar terms are to Two Rivers Water & Farming Company and its subsidiaries.
Corporate Evolution
In 2014, we formed a new company, TR Capital Partners, LLC or TR Capital, which issued all its common units to Two Rivers Water & Farming Company, and our direct and indirect subsidiaries entered into a series of related transactions as the result of which assets and operations of those subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates or controls all of the operations formerly conducted by those subsidiaries, and we classify TR Capital as Two Rivers Water & Farming Company for purposes of our financial statements.
Overview
In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of June 30, 2018, we own 6,508 gross acres. Gross acres owned decreased from 7,376 gross acres at December 31, 2016 due to the sale of 868 acres.
We are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. Our water asset area spans over 1,500 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along the front range of Colorado. As our first water-focused project, we plan to fully develop this basin to properly manage the water contained therein and serve the community while providing returns to our investors.
Since October, 2016 we have refocused on monetizing our assets. Monetization occurs in two different ways: sell or additionally invest. We have determined to sell assets that we have determined will not yield significant future returns to our shareholders and invest strategically in the assets that will. We will take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.
In May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’ common shareholders. As of March 31, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000, or 29.12%. The reported outstanding shares was provided to the Company by GrowCo’s management.
The Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July 17, 2018 the Company was notified by GrowCo’s management that GrowCo will not provide the requested financial information. This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities is no longer required under US GAAP.
Water Redevelopment Company
We formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets from the rest of our business and to enable additional raising of capital for the purpose of investing in our water assets. Water Redevelopment Company is a subsidiary of Two Rivers and focuses on development and redevelopment of infrastructure for water management and delivery. Water is one of the most basic, core assets. Water Redevelopment’s first area of focus is in the Huerfano-Cucharas river basin in southeastern Colorado.
| 8 |
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Two Rivers along with its farming, water and greenhouse operations. All significant inter-company balances and transactions have been eliminated in consolidation.
Under guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months ended June 30, 2018, GrowCo and its related entities were consolidated.
Deconsolidation of GrowCo, Inc.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss a work out arrangement whereby GCP1 will use leasing cash flow to pay the secured note holders. GCP1 management has come to a verbal agreement on a general structure of the payment to the secured note holders of 50% of lease revenue (after direct costs) to be used to pay interest and retire the principal of these notes. However, no written agreement is in place. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Additionally, US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:
a. The aggregate of all of the following:
1. The fair value of any consideration received. In Two Rivers case, no consideration was received.
2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were n retained noncontrolling investments in GrowCo or its related entities.
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:
| Entity | April 1, 2018 | |||
| GrowCo | (1,230,000 | ) | ||
| GrowCo Partners 1, LLC | 3,621,000 | |||
| GCP Super Units, LLC | 5,016,000 | |||
| TR Cap 20150630 Distribution, LLC | 497,000 | |||
| TR Cap 20150930 Distribution, LLC | 460,000 | |||
| TR Cap 20151231 Distribution, LLC | 495,000 | |||
| Total | $ | 8,859,000 | ||
| 9 |
b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
With the above guidance the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s assets.
Investment in GrowCo Partners 1, LLC (GCP1)
Due to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted for under the equity method.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on April 9, 2018.
Non-controlling Interest
Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.
| Entity | June 30, 2018 | Dec 31, 2017 | ||||||
| TR Capital | $ | 20,482,000 | $ | 20,482,000 | ||||
| HCIC | 1,386,000 | 1,388,000 | ||||||
| F-1 | 29,000 | 29,000 | ||||||
| F-2 | 162,000 | 162,000 | ||||||
| DFP | 452,000 | 452,000 | ||||||
| GrowCo | - | (850,000 | ) | |||||
| GrowCo Partners 1, LLC | - | 3,621,000 | ||||||
| GCP Super Units, LLC | - | 5,016,000 | ||||||
| TR Cap 20150630 Distribution, LLC | - | 497,000 | ||||||
| TR Cap 20150930 Distribution, LLC | - | 460,000 | ||||||
| TR Cap 20151231 Distribution, LLC | - | 495,000 | ||||||
| Total | $ | 22,511,000 | $ | 31,752,000 | ||||
In 2015, $152,000 of TR Capital Preferred Membership units were exchanged, pursuant to a pre-existing exchange agreement, for Two Rivers’ common shares and $60,000 of Two Rivers Farms F-2, Inc. (“F-2”) membership units converted into Two Rivers’ common shares.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ materially from those estimates.
Since GrowCo management did not provide its financial information, for the three months ended June 30, 2018, the Company estimated its share of the GrowCo loss as accounted for under the equity method.
| 10 |
Cash and Cash Equivalents
For purposes of reporting cash flows, Two Rivers considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset, which ranges from three to twenty-seven and a half years. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.
Below is a summary of premises and equipment:
| Asset Type | Life in Years | June 30, 2018 | December 31, 2017 | |||||||||
| Office equipment, furniture | 5 – 7 | $ | 12,000 | $ | 12,000 | |||||||
| Computers | 3 | 47,000 | 46,000 | |||||||||
| Vehicles | 5 | 25,000 | 92,000 | |||||||||
| Farm equipment | 7 – 10 | 147,000 | 244,000 | |||||||||
| Buildings | 27.5 | 10,000 | 10,000 | |||||||||
| Website | 3 | 7,000 | 7,000 | |||||||||
| Subtotal | 248,000 | 411,000 | ||||||||||
| Less: Accumulated depreciation | (218,000 | ) | (251,000 | ) | ||||||||
| Net book value | $ | 30,000 | $ | 160,000 | ||||||||
Land
Land acquired for farming or water rights is recorded at cost. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land (Property and Equipment above). Land is not depreciated. However, once per year, Management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.
Water Rights and Infrastructure
Management periodically evaluates the carrying value of its assets including water rights and infrastructure, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there is a $6,930,000 impairment reserve on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.
Intangibles
Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in Huerfano Cucharas Irrigation Company (“HCIC”) and Orlando Reservoir No. 2 Company, LLC (“Orlando”). These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including the historical upward valuation of water rights within Colorado.
Revenue Recognition
Member Assessments
Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to HCIC are eliminated in consolidation of the condensed consolidated financial statements. The assessments that are not eliminated are included in Other revenue.
| 11 |
HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments.
Stock Based Compensation
Beginning January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.
Net Income (Loss) per Share
Basic net (loss) per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period.
The dilutive effect of the outstanding 118,000 RSUs, 2,425,000 options, and 17,536,958 warrants at June 30, 2018 and December 31, 2017, only includes the 118,000 outstanding RSUs with an exercise price of $-0-/share. The remaining options and warrants have an exercise price in excess of the Company’s closing price of $0.135/share as of June 30, 2018; therefore these shares have not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.
Recently Issued Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) “Income Statement – Reporting Comprehensive Income (Topic 220)”. This ASU deals with the reclassification of certain tax effects from Accumulated Other Comprehensive Income. We do not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows”. The new guidance will require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company plans to adopt this new guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Compensation Accounting”, which requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital and treated as an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur. ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The ASU 2016-09 was subsequently updated with ASU 2017-09, issued in May 2017. These standards will become effective for us in fiscal 2018. We do not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.
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In February 2016, the FASB issued ASU 2016-02, “Leases”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management believes that this ASU will have an impact on its financials and is in the process of analyzing its impact.
Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.
NOTE 3 – INVESTMENTS AND LONG-LIVED ASSETS
Land
Upon purchasing land, the value is recorded at the purchase price or fair value, whichever is more appropriate. Costs incurred to prepare the land for the intended purpose are also capitalized in the recorded cost of the land. No amortization or depreciation is taken on land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for any potential impairments.
Water Rights and Infrastructure
The Company has acquired both direct flow water rights and water storage rights. It has obtained water rights through the purchase of shares in a mutual ditch company, which it accomplished through its purchase of shares in HCIC, or through the purchase of an entity holding water rights, which it effected through its purchase of a membership interest of Orlando. The Company may also acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court and administered under the jurisdiction of the Office of the State Engineer.
Subsequent to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there are $6,930,000 of impairments on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.
Gain on Disposal of Assets
During the six months ended June 30, 2018, we sold sub-divided, unimproved lots of land located in El Paso County Colorado and recognized a gain of $80,000.
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NOTE 4 – NOTES PAYABLE
Below is a summary of the Company’s consolidated long term debt:
| June 30, 2018 | December 31, 2017 | |||||||||||||||||||||
| Note | Principal Balance | Accrued Interest | Discount | Principal Balance | Interest rate | Security | ||||||||||||||||
| HCIC seller carry back | $ | 6,301,000 | $ | 488,000 | $ | - | $ | 6,301,000 | 6 | % | Shares in the Mutual Ditch Company | |||||||||||
| CWCB | 690,000 | - | - | 748,000 | 2.5 | % | Certain Orlando and Farmland assets | |||||||||||||||
| McFinney Agri-Finance | 282,000 | - | - | 441,000 | 6.8 | % | 2,579 acres of pasture land in Ellicott Colorado | |||||||||||||||
| TR Note to GrowCo | 390,000 | - | - | - | ||||||||||||||||||
| GrowCo $4M notes | - | - | - | 4,000,000 | 22.5 | % | Various land and water assets | |||||||||||||||
| GrowCo $1.5M exchange note | - | - | - | 100,000 | 22.5 | % | Various land and water assets | |||||||||||||||
| GrowCo $6M exchange note | - | - | - | 1,855,000 | 22.5 | % | ||||||||||||||||
| GrowCo $7M exchange note | - | - | - | 3,132,000 | 10-22.5 | % | ||||||||||||||||
| GrowCo $2M exchange note | - | - | - | 1,520,000 | 10-22.5 | % | ||||||||||||||||
| Bridge loan Harding | - | - | - | 13,000 | 18 | % | None | |||||||||||||||
| Powderhorn Note | 450,000 | - | (85,000 | ) | - | Third lien on Ellicott land | ||||||||||||||||
| Morning View LLC | 105,000 | 2,000 | (7,000 | ) | - | Unsecured | ||||||||||||||||
| TURV Long Term NP | 271,000 | 32,000 | (7,000 | ) | 275,000 | 12.0 | % | Second lien on Ellicott land | ||||||||||||||
| WRC Convertible NP | 300,000 | 46,000 | - | 300,000 | 12.0 | % | Lien on water supply agreement | |||||||||||||||
| WRC Land Notes | 400,000 | 10,000 | (1,000 | ) | - | Butte Valley Land | ||||||||||||||||
| Equipment loans | 67,000 | 2,000 | - | 122,000 | 5 - 8 | % | Equipment | |||||||||||||||
| OID Black Mountain | 157,000 | - | - | 300,000 | Unsecured | |||||||||||||||||
| Total | 9,413,000 | $ | 580,000 | $ | (100,000 | ) | 19,107,000 | |||||||||||||||
| Less: note discounts | (100,000 | ) | (450,000 | ) | ||||||||||||||||||
| Less: Current portion net of discount | (8,139,000 | ) | (17,419,000 | ) | ||||||||||||||||||
| Long term portion net of discount | $ | 1,174,000 | $ | 1,238,000 | ||||||||||||||||||
Notes:
(1) Prime rate + 1%, but not less than 6%
(2) Prime rate + 1.5%, but not less than 6%
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The Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method which, in this situation, equals a straight line method.
HCIC Carry Back Loan
Payments to all of the HCIC note holders are behind scheduled. For the three months ended June 30, 2018, the Company is in technical default on $6,301,000 of the HCIC carry back notes due to non-payment of principal. Consequently, the entire amount of the notes has been classified as current.
GrowCo $4M Notes Guaranty
During the ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse and associated warehouse. The notes pay 22.5% in annual interest, with interested paid monthly, and are due April 1, 2020. GrowCo cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes are in technical default.
On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint is requested immediate payment of the note, back due interest in excess of $300,000, and attorney fees.
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss a work out arrangement whereby GCP1 will use leasing cash flow to pay the secured note holders. While GCP1 management has come to a verbal agreement on a general structure of the payment to the Secured Note holders of 50% of lease revenue (after direct costs) to be used to pay interest and retire the principal of these notes. However, no written agreement is in place. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
Powderhorn Note
The Company has decided to pay Powderhorn’s August 2018 payment by issuance of shares and not in cash. The computation of shares owed is pending.
OID Black Mountain
During the three months ended March 31, 2018, the Company issued 374,250 common shares for a principal reduction of $100,000. It was originally due on October 26, 2017 but was extended to July 31, 2018. It has been further extended to September 30, 2018.
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NOTE 5 – Information on Business Segments
We organize our business segments based on the nature of the products and services offered. We focus on the Water and Greenhouse business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of businesses: Greenhouse and Water. Greenhouse contains our construction and leasing of state of the art greenhouses to cannabis growers. Water contains our Water Business (HCIC and Orlando). Our Parent category is not a separate reportable operating segment. Segment allocations may differ from those on the face of the income statement. The Farming Business has been discontinued and therefore the operating losses and assets have been summarized. Effective April 1, 2018 and for the three months ended June 30, 2018, the Company stopped consolidating GrowCo, the Greenhouse segment.
In the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate, to the corresponding consolidated amount. There are some corporate expenses that were not allocated to the business segments, and these expenses are contained in the “Total Operating Expenses” under Parent.
Operating results for each of the segments of the Company are as follows (in thousands):
| Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||||||||||||||||||||||||||||
| Parent | Farms | Green-house | Water | Total | Parent | Farms | Green-house | Water | Total | |||||||||||||||||||||||||||||||
| Revenue | $ | 5 | $ | - | $ | - | $ | 12 | $ | 17 | $ | - | $ | - | $ | 1,859 | $ | 24 | $ | 1,883 | ||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||
| Total Operating Expenses | (698 | ) | - | - | (526 | ) | (1,224 | ) | (433 | ) | - | (207 | ) | (185 | ) | (825 | ) | |||||||||||||||||||||||
| Total Other Income (Expense) | 12,014 | - | - | (300 | ) | 11,714 | (31 | ) | - | (1,020 | ) | (47 | ) | (1,098 | ) | |||||||||||||||||||||||||
| Net (Loss) from Operations Before Income Taxes | 11,321 | - | - | (814 | ) | 10,507 | (464 | ) | - | 632 | (208 | ) | (40 | ) | ||||||||||||||||||||||||||
| Income Taxes (Expense)/Credit | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Net (Loss) from Operations | 11,321 | - | - | (814 | ) | 10,507 | (464 | ) | - | 632 | (208 | ) | (40 | ) | ||||||||||||||||||||||||||
| Net (Loss) from Discontinued Operations | - | - | (810 | ) | - | (810 | ) | - | (1,081 | ) | - | - | (1,081 | ) | ||||||||||||||||||||||||||
| Preferred dividends | (985 | ) | - | - | (11 | ) | (996 | ) | (987 | ) | - | (203 | ) | (5 | ) | (1,195 | ) | |||||||||||||||||||||||
| Non-controlling interest | - | - | - | - | - | - | - | 146 | (3 | ) | 143 | |||||||||||||||||||||||||||||
| Net Income (Loss) | $ | 10,336 | $ | - | $ | (810 | ) | $ | (825 | ) | $ | 8,701 | $ | (1,451 | ) | $ | (1,081 | ) | $ | 575 | $ | (216 | ) | $ | (2,173 | ) | ||||||||||||||
| Segment Assets | $ | 10,750 | $ | - | $ | - | $ | 20,152 | $ | 30,902 | $ | 1,362 | $ | - | $ | 11,489 | $ | 34,416 | $ | 47,267 | ||||||||||||||||||||
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NOTE 6 – EQUITY TRANSACTIONS
The Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of June 30, 2018, was 33,663,192 common shares.
During the six months ended June 30, 2018, Two Rivers issued the following common stock:
| ● | 374,250 common stock to Black Mountain for a $50,000 in principal reduction in its note payable. |
| ● | 524,000 common stock issued to Spotfin Funding for financial services. These shares issued were expensed in the previous year. |
| ● | 14,840 issued for a conversion from TR Capital into the Company’s common shares. These shares issued were expensed in the previous year. |
During the six months ended June 30, 2018, Two Rivers recognized $745,000 in stock based compensation to its employees and directors.
NOTE 7 – LEGAL PROCEEDINGS
Suncanna Litigation
In 2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
| ● | On April 14, 2016, we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division of the Colorado Department of Revenue. This suspension remains in place until a hearing. |
| ● | Due to the suspension order, Suncanna was in violation of its lease agreement with us. On April 25, 2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Consequently, during the quarter ended March 31, 2016, we stopped recognizing lease revenue and wrote off the $700,000 lease receivable and $43,000 deferred rent that had been recorded as of December 31, 2015. We also wrote off advances to Suncanna totaling $587,000. |
| ● | On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate the greenhouse by September 6, 2016. |
| ● | On August 31, 2016, a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition. |
| ● | On September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016. |
| ● | On October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this decision. |
The Company, the other defendants and the plaintiffs are in discussions to settle this case.
Prior board of directors’ litigation
On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services rendered to the former board members at their behest while members of the board. At present, the matter is scheduled for trial in October 2018. The $139,000 is included in our accounts payable on the balance sheet.
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DFP litigation
On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims.
State of Colorado litigation
The Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation in the Colorado Division 2 Water Court concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. The Company has withdrawn this suit with prejudice, and the water rights holders have sued for their legal fees.
In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims at that time. Under the stipulation agreement, Two Rivers agreed to take the existing dam structure down to the sediment level by March 31, 2018. Two Rivers has been able to empty all the water in the Dam but was not able to meet the requirements of the agreement by March 31, 2018 due to lack of capital. On April 3, 2018, the State filed a motion for the issuance of a contempt of court citation against the Company, its directors, former director John McKowen, and certain other individuals for breach of the agreement seeking sanctions, imposition of a civil penalty of $100,000 and payment of legal fees. The Company and its directors are contesting the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive. Preliminary hearings for the defendants were held on May 10 and June 8, 2018. At the May 10, 2018 hearing it was determined that the State of Colorado could proceed with its action. At the June 8 hearing, a trial date of December 17, 2018 was set by the Court.
The Company intends to continue its efforts to seek funding so that it can comply with the agreement. If successful in obtaining financing, the Company intends to work with the Colorado State Engineer to take down the existing dam. Once this work is completed, the Company will seek additional funding to construct a new dam close to the prior dam structure. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.
NOTE 8 – DISCONTINUED OPERATIONS
Dionisio Farms & Produce
During the fourth quarter of 2016, we decided to discontinue operations of our Dionisio Farms and Produce (DFP) subsidiary. We decided to sell all assets associated with this business due to the sustained losses incurred.
The DFP loss from discontinued operations presented in the statements of operations consist of the following for the six months ended June 30, 2018 and June 30, 2017:
| June 30, 2018 | June 30, 2017 | |||||||
| Revenues | $ | - | $ | - | ||||
| Cost of goods sold | - | - | ||||||
| General and administrative expenses | - | 353,000 | ||||||
| Depreciation and amortization | - | 1,000 | ||||||
| Interest | - | 41,000 | ||||||
| Other (loss on disposal of assets and intangibles | - | 686,000 | ||||||
| Total | $ | - | $ | (1,081,000 | ) | |||
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On March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds from the auction were $1,740,000 with net proceeds of $1,611,000. Proceeds were used to pay off secured debt first with the residual proceeds used to pay unsecured debt.
GrowCo and related entities
Effective April 1, 2018, the Company is no longer consolidating the financials of GrowCo and its related entities. The effect of deconsolidation created a one-time non-cash gain of $12,773,000 and a recognition of a loss from GrowCo discontinued operations of $810,000; broken down as follows:
| June 30, 2018 | June 30, 2017 | |||||||
| Revenues | $ | 52,000 | $ | - | ||||
| General and administrative expenses | (89,000 | ) | - | |||||
| Depreciation and amortization | (61,000 | ) | - | |||||
| Interest | (1,092,000 | ) | - | |||||
| Non-controlling interest | 380,000 | - | ||||||
| Total | $ | (810,000 | ) | $ | - | |||
NOTE 9 – CONTINGENT LIABILITY
Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see above Note 2 – Principals of Consolidation), under ASC 460-10-05, management has determined that the Company is a guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss a work out arrangement whereby GCP1 will use leasing cash flow to pay these note holders. While GCP1 management has come to a verbal agreement on a general structure of the payment to GrowCo Note holders whereby 50% of lease revenue (after direct costs) to be used to pay interest and retire the principal of these note holders. However, no written agreement is in place. Since Two Rivers’ management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. Therefore, the Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).
NOTE 10 – GOING CONCERN
The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not generated significant revenues and has incurred net losses (including significant non-cash expenses) of $12,924,000 during the year ended December 31, 2017 and a profit of 8,701,000 for the six months ended June 30, 2018, which is due to a non-cash gain on the consolidation of GrowCo of $17,323,000. At June 30, 2018, the Company had a working capital deficit of $17,168,000 and an accumulated deficit of approximately $88,500,000, respectively. The HCIC seller carry back debt are in technical default.
These factors raise doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management’s plans to mitigate.
For the six months ended June 30, 2018, we have collected $1,026,000 in additional debt.
In addition, the Company is in different stages of discussion with parties interested in providing capital.
We continue to reduce our general and administrative and cash required for our operations.
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NOTE 11 – RELATED PARTY
There were no related party transactions during the six months ended June 30, 2018.
NOTE 12 – SUBSEQUENT EVENTS
Pursuant to ASC 855, management has evaluated all events and transactions that occurred from June 30, 2018 through the date of issuance of these financial statements. During this period, we had the following significant subsequent events:
| ● | On July 23, 2018, a potential strategic partner committed to a $500,000 bridge loan to be funding over a period beginning July 23, 2018 and completed by August 31, 2018. To date, $200,000 of this bridge loan has been funded. |
| ● | On July 19 and August 9, the Company issued a total of 566,775 shares of its common stock as a payment for investment advice to Spotfin Funding, representing a payment of $65,000. These shares issued were expensed in the previous year. |
| ● | On August 1 the Company issued 500,000 shares of its common stock for a $50,000 reduction of the note owed to Black Mountain Equities. |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Form 10-Q to “we,” “our,” “us” and similar terms refer to Two Rivers Water & Farming Company and its subsidiaries.
Note about Forward-Looking Statements
This Form 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, including the risks described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017. 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
Our core business is the development of our water assets.
Current Rights Holdings
In Colorado it is important to have both surface and storage rights, of which we have both. To date, we have acquired, managed and used our water assets principally for use in irrigation, to increase the value and yield of our farmland. While the majority of our assets relate to water, our efforts have focused on our farmland and, more recently, our marijuana greenhouse projects.
We own the following surface water rights as of August 10, 2018:
| Structure | Elevation (feet) | Priority No. | Appropriation Date | Consumptive Use (A.F.*) | Decreed Amount (cfs**) | |||||||||||||
| Butte Valley Ditch | 5,909 | 1 | 05/15/1862 | 360 | 1.2 | |||||||||||||
| 9 | 05/15/1865 | 1.8 | ||||||||||||||||
| 86 | 05/15/1886 | 3.0 | ||||||||||||||||
| 111 | 05/15/1886 | 3.0 | ||||||||||||||||
| Robert Rice Ditch | 5,725 | 19 | 03/01/1867 | 131 | 3.0 | |||||||||||||
| Huerfano Valley Ditch | 4,894 | 120 | 02/02/1888 | 2,891 | 42.0 | |||||||||||||
| 342 | 05/01/1905 | 18.0 | ||||||||||||||||
| * | A.F. = Acre Feet, enough water to cover one acre one foot deep, which is 325,829 gallons |
| ** | cfs = cubic feet per second, which is 449 gallons per minute, 1 cfs per day = 646,272 gallons |
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The following table presents our holdings of storage water rights as of August 10, 2018:
| Structure | Elevation (feet) | Priority No. | Appropriation Date | Average Annual Yield (A.F.) | Decreed Amount (A.F.) | Operable Storage (A.F.) | ||||||||||||||||
| Huerfano Valley Reservoir | 4,702 | 6 | 02/02/1888 | 1,424 | 2,017 | 1,000 | ||||||||||||||||
| Cucharas Valley Reservoir | 5,570 | 66 | 03/14/1906 | 3,055 | 31,956 | * | ||||||||||||||||
| 5,705 | 66 | c** | 03/14/1906 | 34,404 | ||||||||||||||||||
| Bradford Reservoir | 5,850 | 64.5 | 12/15/1905 | - | 6,000 | - | ||||||||||||||||
| Orlando Reservoir #2 | 5,911 | 349 | 12/14/1905 | 1,800 | 3,110 | 2,400 | ||||||||||||||||
| * | See State of Colorado litigation. |
| ** | This is a conditional right while the engineering and construction of structures are completed to perfect a water right, in this case to physically store the water. The conditional right establishes a seniority date but allows time for completion of the project. Conditional rights are reviewed every six years by the water court to confirm that progress is being made on the effort to perfect the right. When a conditional water right is perfected, which can be done incrementally in the case of storage, the water right becomes absolute. In addition, the Cucharas Valley Reservoir has Conditional rights to 34,404 A.F. of additional storage. |
New Strategic Initiative
Based on findings from our water task force, we believe we have several opportunities to capitalize on water assets that we currently own or can acquire, in order to address serious storage and supply challenges faced by municipalities, ranches, farmlands and other commercial enterprises in the Arkansas River Basin. In order to address these opportunities, we have identified the following:
| ● | We will seek to address the need for municipal water storage. |
| ● | We believe there are a variety of opportunities to lease, both short term and long term, our water assets. |
| ● | We have identified underutilized land and water that we own that could be used to expand our irrigated farming operations. |
| ● | In January 2011, we entered into a water supply agreement to supply water resources for real estate development in Huerfano County, Colorado. |
| ● | Expansion of hemp farming on our irrigated farmland, either as an operator or with a crop share arrangement. |
In order to implement this new initiative, additional capital is required. We have been in discussions with numerous providers of capital in a form of new debt, equity, a strategic operational relationship, or a combination of different capital vehicles. Once completed, revenue is anticipated via the leasing of water storage, leasing of water to high value crop producers (e.g. hemp and marijuana growers), and sale of water via our water supply agreement at $6,500 per tap, with approximately 3 taps per acre foot.
Results of Operations
For the Three Months Ended June 30, 2018, compared to the Three Months Ended June 30, 2017
During the three months ended June 30, 2018, we recorded revenues of $10,000, compared to $1,341,000 in the three-month period ended June 30, 2017. The decrease in revenues from the prior year was due to the deconsolidation of GrowCo and its related entities, which were the greenhouse operations.
Operating expenses during the three months ended June 30, 2018 and 2017 were $504,000 and $297,000, respectively. The increase of $207,000 was primarily due to increase in stock option and warrant costs of $173,000 and higher legal costs. During the three months ended June 30, 2018 and 2017, we recognized a loss from continuing operations of $494,000 compared to a profit of $510,000, respectively. For the three months ended June 30, 2018 and 2017, loss from discontinued operations was $-0- and $534,000 respectively.
Other income (expenses) for the three months ended June 30, 2018 and 2017 were $11,913,000 and $(534,000) respectively. The increase of $12,465,000 was almost entirely due to the gain on deconsolidation of GrowCo of $12,773,000 along with a reduction of interest expense of $475,000 offset largely due to a recognition of an impairment of $617,000 for the GrowCo investment.
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As the result of the foregoing, the net profit (loss) attributed to our common shareholders, after recognizing preferred distributions and income attributed to non-controlling interest, profit for the three months ended June 30, 2018 was $10,918,000, compared to a loss of $(458,000) for the three months ended June 30, 2017.
For the Six Months Ended June 30, 2018, compared to the Six Months Ended June 30, 2017
During the six months ended June 30, 2018, we recorded revenues of $17,000, compared to $1,883,000 in the six-month period ended June 30, 2017. The decrease in revenues from the prior year was due to the deconsolidation of GrowCo and not recognizing $1,859,000 in greenhouse lease revenues.
Operating expenses during the six months ended June 30, 2018 and 2017 were $1,224,000 and $825,000, respectively. The increase of $399,000 was due to an increase of $551,000 for stock option and warrant expense with an offset of a reduction of general and administrative and depreciation due the deconsolidation of GrowCo for the three months ended June 30, 2018.
Other income (expenses) for the six months ended June 30, 2018 and 2017 were $11,714,000 and $(1,098,000) respectively. The increase of $12,812,000 was almost entirely due to the recognition of a $12,773,000 gain from the deconsolidation of GrowCo.
During the six months ended June 30, 2018 and 2017, we recognized a profit (loss) from continuing operations of $10,507,000 compared to a loss of $(40,000), respectively. For the six months ended June 30, 2018 and 2017, loss from discontinued operations was $810,000 and $1,081,000 respectively.
As the result of the foregoing, the net profit (loss) attributed to our common shareholders, after recognizing preferred distributions and income attributed to non-controlling interest, for the six months ended June 30, 2018 was $8,701,000, compared to a loss of $(2,173,000) for the six months ended June 30, 2017. The increase of $10,874,000 is due primarily to the substantial decrease in greenhouse revenues and the other reasons stated above.
Liquidity and Capital Resources
We historically have funded our operations primarily from the following sources:
| ● | proceeds of private placements of equity, equity-related and debt securities of Two Rivers Water & Farming Company and subsidiaries; |
| ● | cash flow generated from operations; and |
| ● | loans and lines of credit. |
As of June 30, 2018, we had cash and cash equivalents of $36,000. As of June 30, 2018, we had no available commercial banking line or letters of credit and do not intend to seek any such financing in the foreseeable future.
We currently expect that our cash expenditures will remain constant for the foreseeable future, as we seek to monetize our water assets. As a result, our existing cash, cash equivalents and other working capital may not be sufficient to meet all projected cash needs contemplated by our business strategies for the remainder of 2018 and for 2019. To the extent our cash, cash equivalents and other working capital are insufficient to fund our planned activities, we may need to either slow our growth initiatives or raise additional funds through public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to affect one or more acquisitions of businesses, technologies and products. If additional funding is required, we cannot assure that we will be able to affect an equity or debt financing on terms acceptable to us or at all.
Sources of Funds
Cash flow from operations has not historically been sufficient to sustain our operations. Cash flow consumed by our operating activities totaled $576,000 for the six months ended June 30, 2018 and $2,042,000 for the six months ended June 30, 2017.
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Cash flows generated by our financing activities for the six months ended June 30, 2018 was $618,000 compared to $2,084,000 for the six months ended June 30, 2017. During the six months ended June 30, 2018, we raised $1,026,000 from new debt offerings and reduced $408,000 for payments on note payables.
Uses of Funds
Cash flow from operations has not historically been sufficient to sustain our operations. Cash flow consumed by our operating activities totaled $576,000 for the six months ended June 30, 2018 and $2,042,000 for the six months ended June 30, 2017.
Cash used by investing activities was $20,000 for the six months ended June 30, 2018 compared to cash generated by investing activities of $344,000 for the six months ended June 30, 2017.
The Company is implementing a new strategy focusing on its water assets along with associated capital raises. During the year ended December 31, 2017, we have raised $457,000 for our new Water Redevelopment Company. From January 1, 2018 through August 10, 2018 we have raised $650,000.
We cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned.
We believe that the actions planned by management to address our liquidity issues as described above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results from operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Note 2 of the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q. Our preparation of such condensed consolidated financial statements and this Form 10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our 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
We follow specific and detailed guidelines in measuring revenue; however, certain judgments may affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.
Goodwill and Intangible Assets
We have acquired water shares in Huerfano-Cucharas Irrigation Company, which is considered an intangible asset and shown on our balance sheet as part of “Water assets.” Currently, these shares are recorded at purchase price less our pro rata share of the negative net worth in HCIC Holdings, LLC. 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 water shares.
Impairment Policy
At least once every year, management examines all of our assets for proper valuation and to determine if an 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 an impairment charge is recorded.
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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 and water assets. Because we had no market risk sensitive instruments outstanding as of June 30, 2018, 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
Management’s Evaluation of Disclosures Controls and Procedures
Our management, comprised of our chief executive officer (CEO) and chief financial officer (CFO), presently the same person fills both officer roles, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, and taking the matters described below into account, the Company’s CEO and CFO and have concluded that our disclosure controls and procedures over financial reporting were not effective during reporting period ended June 30, 2018.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. “Internal control over financial reporting” is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and | |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements. |
A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.
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Based upon our evaluation of internal controls, the Company’s management determined that the Company’s controls over financial reporting were not adequate to ensure complex accounting calculations were performed correctly. As such, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures contain a material weakness as of the end of the period covered by this Report. Because of the material weaknesses identified, a reasonable possibility exists that a material misstatement in our consolidated financial statements will not be prevented or detected on a timely basis. While our internal controls are established and followed, it is clear by the identified weaknesses that they were not operating as they should be. Management believes that this was the case due to our limited staff along with time constraints and staff turnover. However, our Chief Executive Officer and Chief Financial Officer, who is also our Principal Accounting Officer, believes that the financial statements included in this quarterly report on Form 10-Q present, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.
Plan for Remediation of Material Weaknesses
The remediation effort outlined below is intended to address the identified material weaknesses in internal control over financial reporting.
Once significant additional capital is raised, we plan to hire a qualified Chief Financial Officer. A short-term task of the new CFO will be to do a formal assessment of our internal controls.
This Quarterly Report on Form 10-Q does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act. We are a smaller reporting company and are eligible for this exemption under the Dodd-Frank Act.
Changes in Internal Control over Financial Reporting
We will continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the facts described above and employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.
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Since 2016, the Suncanna lease arrangement was the subject of administrative and judicial proceedings:
| ● | On April 14, 2016 we were notified that Suncanna LLC had received a notice of suspension from the Marijuana Enforcement Division of the Colorado Department of Revenue. This suspension remains in place until a hearing. |
| ● | This caused Suncanna to be in violation of its lease with GCP1. On April 25, 2016, GCP1 terminated Suncanna’s lease and began an eviction process against Suncanna. Due to the eviction process, during the three months ended March 31, 2016, we wrote off $743,000 in Lease Revenues – Related Party, wrote off $587,000 in advances to Suncanna, and did not recognize any Lease Revenues – Related Party. |
| ● | On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate the greenhouse by September 6, 2016. |
| ● | On August 31, 2016 a lawsuit was filed by Aaron Van Wingerden, owner of Suncanna, in Pueblo County Colorado District Court against GrowCo, GrowCo Business Development, LLC, GCP1, GrowCo Funding, LLC., TR Capital, Two Rivers and certain current and former employees, and associates. We believe that the suit has no merit and will have no material impact on our financial condition. |
| ● | On September 6, 2016, in accordance with the Writ of Restitution, Suncanna vacated the greenhouse and GCP1 took possession and began re-conditioning its greenhouse for a new tenant, who began growing operations in the fourth quarter of 2016. |
| ● | On October 27, 2016, in a contempt of court hearing, a Pueblo County Colorado District Court judge ruled in favor of plaintiff Aaron Van Wingerden and against GCP1 in a matter regarding the prevention of Suncanna’s access to GCP1’s greenhouse prior to Suncanna vacating the premises on September 6, 2016. We believe that this ruling was in error and are appealing this decision. |
The Company, the other defendants and the plaintiffs are in discussions to settle this case.
The Company, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation in the Colorado Division 2 Water Court concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. The Company has withdrawn this suit with prejudice, and the water rights holders have sued for their legal fees.
In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims at that time. Under the stipulation agreement, Two Rivers agreed to take the existing dam structure down to the sediment level by March 31, 2018. Two Rivers has been able to empty all the water in the Dam but was not able to meet the requirements of the agreement by March 31, 2018 due to lack of capital. On April 3, 2018, the State filed a motion for the issuance of a contempt of court citation against the Company, its directors, former director John McKowen, and certain other individuals for breach of the agreement seeking sanctions, imposition of a civil penalty of $100,000 and payment of legal fees. The Company and its directors are contesting the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive. Preliminary hearings for the defendants were held on May 10 and June 8, 2018. At the May 10, 2018 hearing it was determined that the State of Colorado can proceed with its action. At the June 8 hearing, a trial date of December 17, 2018 was set by the Court.
The Company intends to continue its efforts to seek funding so that it can comply with the agreement. If successful in obtaining financing, the Company intends to work with the Colorado State Engineer to take down the existing dam. Once this work is completed, the Company will seek additional funding to construct a new dam close to the prior dam structure. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.
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On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey Wells and John Stroh demanding Two Rivers pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services rendered to the former board members at their behest while members of the board. At present, the mater is scheduled for trial in October 2018. The $139,000 is included in our accounts payable on the balance sheet.
On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims.
The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2017, could materially and adversely affect our business, financial condition and results of operations. Those risk factors do not identify all risks that we face, and operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
The following exhibits are being filed as part of this Form 10-Q:
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Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 & FARMING COMPANY | ||
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Date: August 13, 2018 |
By: | /s/ Wayne Harding |
| Wayne Harding | ||
| Chief Executive Officer and acting Chief Financial Officer | ||
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EXHIBIT INDEX
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