Form 10-Q TWO RIVERS WATER & FARMI For: Mar 31

May 14, 2018 12:25 PM EDT

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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 March 31, 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. Employee

Identification No.)

 

3025 S Parker Rd.

Suite 140

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 May 11, 2018, there were 33,124,147 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 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
   
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 31
Item 6. Exhibits 31
   
SIGNATURES 32

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

  Page
Financial Statements (Unaudited):  
Condensed Consolidated Balance Sheets – March 31, 2018 and December 31, 2017 4
Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2018 and 2017 5
Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017 6
Notes to Condensed Consolidated Financial Statements 8

 

 3 

 

 

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except for number of shares)

 

   March 31, 2018    December 31, 2017  
   (unaudited)   (Derived from Audit) 
ASSETS:          
Current Assets:          
Cash and cash equivalents  $23   $14 
Accounts receivable, net   5    5 
Accounts receivable, related party   10    19 
Deposits and other current assets   32    32 
Total Current Assets   70    70 
Long Term Assets:          
Property, equipment and software, net   148    160 
Land   3,441    3,505 
Water assets   25,052    25,016 
Greenhouse & infrastructure, net   5,898    5,955 
Construction in progress   3,361    3,361 
Other long term assets   86    85 
Total Long Term Assets   37,986    38,082 
TOTAL ASSETS  $38,056   $38,152 
           
LIABILITIES & STOCKHOLDERS’ EQUITY:          
Current Liabilities:          
Accounts payable  $1,623   $1,553 
Accrued liabilities   3,096    1,837 
Current portion of notes payable, net of discount   17,979    17,419 
Preferred dividend payable   4,466    3,968 
Total Current Liabilities   27,164    24,777 
Notes Payable, net of current portion   1,032    1,238 
Total Liabilities   28,196    26,015 
Commitments & Contingencies (Notes 5, 8, 11, 13)          
Stockholders’ Equity:          
Common stock, $0.001 par value, 100,000,000 shares authorized, 33,124,170 shares issued and outstanding at March 31, 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 and December 31, 2017.   252    252 
Additional paid-in capital   77,590    77,267 
Accumulated (deficit)   (99,385)   (97,168)
Total Two Rivers Water Company Shareholders’ Equity   (21,509)   (19,615)
Noncontrolling interest in subsidiaries   31,369    31,752 
Total Stockholders’ Equity   9,860    12,137 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY  $38,056   $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 March 31, 
   2018   2017 
Revenue          
Leasing - Greenhouse  $52   $536 
Other   7    6 
Total Revenue   59    542 
Direct cost of revenue   -    - 
Gross Margin   59    542 
Operating Expenses:          
General and administrative   766    399 
Depreciation and amortization   104    129 
Total operating expenses   870    528 
Loss from Operations   (811)   14 
Other Income (Expense)          
Interest expense   (1,389)   (490)
Gain (loss) on disposal of assets and intangibles   80    (72)
Other income (expense)   18    (2)
Total other income (expense)   (1,291)   (564)
Net (Loss) from Continuing Operations before Taxes   (2,102)   (550)
Income tax (provision) benefit   -    - 
Net (Loss) from Continuing Operations   (2,102)   (550)
Net (Loss) from Discontinued Operations   -    (547)
Net (Loss) before Preferred Dividends and Non-Controlling Interest   (2,102)   (1,097)
Net income attributable to noncontrolling interest   383    58 
Net (Loss)   (1,719)   (1,039)
Preferred distributions   (498)   (676)
Net (Lost) Attributable to Two Rivers Water & Farming Company Common Shareholders  $(2,217)  $(1,715)
Loss Per Common Share - Basic and Dilutive:          
(Loss) Per Share - Basic and Dilutive  $(0.07)  $(0.06)
Weighted Average Shares Outstanding:          
Basic and dilutive   32,937    31,475 

 

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)

 

   Three Months Ended March 31, 
   2018   2017 
Cash Flows from Operating Activities:          
Net loss, before NCI  $(2,600)  $(1,773)
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Depreciation   104    129 
Accretion of debt discount   124    122 
Asset impairment   -    - 
(Gain) loss from debt extinguishment   -    46 
Write off of Suncanna receivable and advance   -    - 
Stock Option and Warrant expense   373    199 
Loss (Gain) from disposal of fixed assets   (80)   319 
Net change in operating assets and liabilities:          
Decrease in accounts receivable   -    32 
Decrease (increase) in accounts receivable, related party   9    (594)
(Increase) in deposits, prepaid expenses and other assets   (1)   (16)
Increase (decrease) increase in accounts payable   70    (377)
(Decrease) increase in distribution payable to preferred shareholders   498    676 
Increase in accrued liabilities and other   1,159    169 
Net Cash Used in Operating Activities   (344)   (1,068)
Cash Flows from Investing Activities:          
Sale of property and equipment   36    483 
Investment in water assets   (71)   - 
Construction in progress   -    (435)
Net Cash Used in Investing Activities   (35)   48 
Cash Flows from Financing Activities:          
Preferred membership offerings   -    252 
Proceeds from warrant exercises   -    208 
Proceeds from debt   564    904 
Payment on notes payable   (176)   (88)
Net Cash Provided by Financing Activities   388    1,276 
Net Increase in Cash & Cash Equivalents   9    256 
Beginning Cash & Cash Equivalents   14    150 
Ending Cash & Cash Equivalents  $23   $406 

 

Continued on next page

 

 6 

 

 

Continued from previous page

 

   Three Months Ended March 31, 
   2018   2017 
Supplemental Disclosure of Cash Flow Information          
Cash paid for interest  $91   $223 
Shares issued in exchange for debt  $-   $202 
Conversion of debt, preferred shares into Two Rivers common stock  $50   $- 
Land Exchanged for debt  $108   $1,098 

 

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 Three Months Ended March 31, 2018 and March 31, 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. Two Rivers has divided its operations into our traditional lines of business of farming and water, which are operated by us, and our cannabis-focused business, which is operated by our subsidiary GrowCo, Inc., or GrowCo.

 

Overview

 

In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of December 31, 2017, we own 6,538 gross acres. Gross acres owned decreased from 7,376 gross acres at December 31, 2016 due to the sale of 838 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 1,900 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. Specifically, we are selling our irrigated farmland currently used for the production of produce, the associated Dionisio produce business along with land that no longer serves our strategic vision of water management. 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 based on four record dates (January 1, 2015; April 1, 2015; July 1, 2015, and October 1, 2015) after an effective registration statement is filed, which has not yet occurred. Each record date will distribute 2,500,000 GrowCo common shares on a prorata basis of shares owned of Two Rivers’ common shares.

 

On January 20, 2015, GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land.

 

During the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially fund the second greenhouse and provide working capital.

 

 8 

 

 

In March 2016, GrowCo completed a $5.5 million private placement of equity interests of GCP Super Units, LLC, which will invest directly in various assets of GCP1 and GCP2, with proceeds to be used to complete the construction of the first greenhouse, partially fund the second greenhouse and provide working capital. The outside investment in GCP Super Units, LLC is reflected on our balance sheet as a non-controlling equity interest.

 

GCP1’s greenhouse was partially occupied in September 2015 with lease revenue beginning September 1, 2015. On April 14, 2016, we received notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that the then current tenant, Suncanna, LLC (“Suncanna”), had received a suspension order. On July 22, 2016 GCP1 received a Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna to vacate GCP1’s 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. The Company believes that the suit has no merit and will have no material impact on the Company’s financial condition. A court hearing has been set to begin October 16, 2018 in State of Colorado County of Pueblo District Court.

 

Pending the eviction of Suncanna, on August 4, 2016 GCP1 entered into a lease agreement with a related party Johnny Cannaseed, LLC, a related party (“Johnny Cannaseed”) which is owned predominantly by our former CEO John McKowen who is a significant shareholder in the Company. Under the terms of the lease, one half of the GCP1 greenhouse was sublet to a licensed marijuana grower on December 1, 2016. The second half of the greenhouse was leased to a second licensed marijuana grower on March 1, 2017.

 

Johnny Cannaseed was not able to receive a license to grow marijuana. Therefore, Johnny Cannaseed subleased, with the approval of GCP1’s board, to two tenants. In 2017, GCP1 expended $308,000 to divide the greenhouse into two, mostly equal, parts, referred to as GCP1-1 and GCP1-2. For the year ended December 31, 2017, the GCP1-1 tenant paid to Johnny Cannaseed $620,000 which was paid to GCP1. The GCP1-2 tenant did not pay any rent and was subsequently evicted by Johnny Cannaseed in December 2017. Johnny Cannaseed is proceeding to collect back due rent from the GCP1-2 tenant. For the year ended December 31, 2017, the Company’s consolidated income only recognizes the actual rent received of $620,000. Effective February 1, 2018, GCP1 released Johnny Cannaseed from its lease. At that time, GCP1 signed a lease with the then current sub-lessee of GCP1-1. The GCP1-1 is concurrently in default of its lease through its late and non-payment of lease payments due GCP1. GCP1 has begun an eviction process of the tenant occupying GCP1-1.

 

GrowCo’s second greenhouse project will also consist of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on an additional 40 acres of land. Upon completion, this project will be operated, as a landlord, by GrowCo Partners 2, LLC, or GCP2. GCP2’s greenhouse structure was ordered in 2016. Construction on this greenhouse began in early January 2016 with an unknown completion date. It is necessary to raise additional capital to complete GCP2.

 

In the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25 GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000 principal amount of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding.

 

A new $2M offering was subsequently initiated in March 2017 with substantially the same terms of prior GrowCo notes for the purposes of supporting operations and finishing the second greenhouse. As of December 31, 2017, $1,520,000 was raised for this offering along with an additional $386,000 under the $7 million exchange note.

 

During the three months ended March 31, 2018, GrowCo and its subsidiaries did not raise any additional capital.

 

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.

 

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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, are consolidated for financial statement purposes. The Company owns a minority position in GrowCo’s common shares, but due to cross collateralization of some of the Company’s assets, ASC requires consolidation.

 

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 months ended March 31, 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  3/31/18   12/31/17 
TR Capital  $20,482,000   $20,482,000 
HCIC   1,385,000    1,388,000 
F-1   29,000    29,000 
F-2   162,000    162,000 
DFP   452,000    452,000 
GrowCo   (1,230,000)   (850,000)
GrowCo Partners 1, LLC   3,621,000    3,621,000 
GCP Super Units, LLC   5,016,000    5,016,000 
Water Redevelopment Co. LLC   -    - 
TR Cap 20150630 Distribution, LLC   497,000    497,000 
TR Cap 20150930 Distribution, LLC   460,000    460,000 
TR Cap 20151231 Distribution, LLC   495,000    495,000 
Total  $

31,369,000

   $31,752,000 

 

 10 

 

  

Reclassification

 

Certain amounts previously reported have been reclassified to conform to current presentation. Certain labels of accounts/classifications have been changed.

 

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.

 

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   March 31, 2018   December 31, 2017 
Office equipment, furniture   5 – 7   $11,000   $12,000 
Computers   3    47,000    46,000 
Vehicles   5    136,000    92,000 
Farm equipment   7 – 10    195,000    244,000 
Irrigation system   10    -    - 
Buildings   27.5    15,000    10,000 
Website   3    7,000    7,000 
Subtotal        411,000    411,000 
Less: Accumulated depreciation        (263,000)   (251,000)
Net book value       $148,000   $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. 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.

 

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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

 

Leasing Greenhouse

 

The lease between GrowCo Partners 1, LLC and its lessee is classified as an operating lease under ASC 840. However, due to the uncertainty of lease payments, for the year ended December 31, 2017, only the actual lease revenues received were recognized.

 

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 financial statements.

 

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.

 

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.

 

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 (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 (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, 3,847,500 options, and 16,469,328 warrants at March 31, 2018 and December 31, 2017, has 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.

 

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In July 2017, FASB issued ASU “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Management believes that Topics 260 and 480 pertains to the Company and the impact will be immaterial.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows”. The new guidance will require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents is required to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The Company plans to adopt this new guidance in the first quarter of fiscal year 2018 and does not expect the adoption to have a material impact on our financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Compensation Accounting”, which requires that excess tax benefits are recorded on the income statement as opposed to additional paid-in-capital and treated as an operating activity on the statement of cash flows. ASU 2016-09 also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest (current U.S. GAAP) or account for forfeitures when they occur. ASU 2016-09 further requires cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The ASU 2016-09 was subsequently updated with ASU 2017-09, issued in May 2017. These standards will become effective for us in fiscal 2018. We do not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.

 

In February 2016, the FASB issued ASU 2016-02, “Leases”. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASU is expected to result in all operating leases being capitalized in the Company’s financial statements. Due to the GrowCo leases, management believes that this ASU will have an impact on its financials and is in the process of analyzing its impact.

 

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position to simplify the presentation of deferred income taxes. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on its financial statements.

 

In August 2015, the FASB issued ASU 2015-14 which updated (to defer the effective date by one year) previously issued ASU 2014-09, “Revenue from Contracts with Customers”, which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to record the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Expanded additional disclosures are required relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of fiscal year 2018 using one of two prescribed retrospective methods. Early adoption is not permitted. At this point, due to the Company having no revenue contracts with customers, except for leasing agreements, Management believes that there will be no material impact on its financial statements.

 

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In April 2015, FASB issued ASU 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is allowed for financial statements that have not been previously issued. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The Company has elected to adopt this ASU early and is presented in these financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management has early adopted ASU 2015-11 and notes no material impact on the Company’s financial position or results of operations.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 amends FASB ASC 205-40 Presentation of Financial Statements – Going Concern”, by providing guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements, including requiring management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements and providing certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 will be effective after December 15, 2016, and early adoption is permitted.

 

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.

 

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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 no impairments on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.

 

GrowCo, GCP1, GCP2 Greenhouse Construction in Progress

 

Construction costs are capitalized, and not amortized or depreciated until the construction is completed in accordance with ASC 360 and 835. The Company has completed the construction of its first greenhouse (90,000 square feet plus a 1,000 square feet boiler/mechanical room) and related warehouse facilities (15,000 square feet).

 

Construction costs are as follows:

 

   March 31, 2018   December 31, 2017 
Beginning balance  $3,361,000   $3,520,000 
Additions   -    506,000 
Finished - Transferred   -    (665,000)
Ending Balance  $3,361,000   $3,361,000 

 

The Company estimates an additional expenditure of $3.5 million is required for the completion of the GCP2 greenhouse and warehouse.

 

Gain on Disposal of Assets

 

During the three months ended March 31, 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:

 

   March 31, 2018   December 31, 2017    
Note  Principal Balance   Accrued Interest   Discount   Principal Balance   Interest rate   Security
HCIC seller carry back  $6,301,000   $394,000   $-   $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 GrowCo, Inc.   331,000    -    -    441,000    6.8%  2,579 acres of pasture land in Ellicott Colorado
GrowCo $4M notes   4,000,000    923,000    (35,000)   4,000,000    22.5%  Various land and water assets
GrowCo $1.5M exchange note   100,000    11,000    -    100,000    22.5%  Various land and water assets
GrowCo $6M exchange note   1,855,000    537,000    (61,000)   1,855,000    22.5%   
GrowCo $7M exchange note   3,132,000    646,000    (133,000)   3,132,000    10-22.5%    
GrowCo $2M exchange note   1,520,000    328,000    (83,000)   1,520,000         
General Note   8,000    -    -    -         
Bridge loan Harding   -    -    -    13,000         
Powderhorn   619,000    -    (121,000)   -        Third lien on Ellicott land
TURV Long Term NP   271,000    19,000    (14,000)   275,000    12.0%  Second lien on Ellicott land
WRC Convertible NP   300,000    26,000    -    300,000    12.0%  Lien on water supply agreement
Equipment loans   132,000    -    -    122,000    5 - 8%   Equipment
OID Black Mountain   199,000    -    -    300,000         
Total   19,458,000    2,884,000    (447,000)   19,107,000         
Less: note discounts   (447,000)             (450,000)        
Less: Current portion net of discount   (17,979,000)             (17,419,000)        
Long term portion net of discount  $1,032,000             $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. As of March 31, 2018, and December 31, 2017, the total debt discount was $447,000 and $450,000, respectively.

 

HCIC Carry Back Loan

 

For the three months ended March 31, 2018, the Company is in technical default on $5,984,000 of the HCIC carry back notes due to non-payment of principle. Consequently, the entire amount of the notes has been classified as current.

 

GrowCo $4M Notes

 

During the year ended December 31, 2015, the Company, through its subsidiary GrowCo, issued $4,000,000 in promissory notes to 17 individual investors. The notes have a security interest in the land, water and improvements to the 157 acres where GrowCo Partners 1 and GrowCo Partners 2 are developing the greenhouses. It is through the cross collateralization of assets owned by Two Rivers, that consolidation of GrowCo into Two Rivers’ financials are required under Accounting Standards Codification Variable Interest Entities.

 

The notes pay 22.5% in annual interest, with interested paid monthly, and are due April 1, 2020. The Company 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 this call provision, the net amount of the GrowCo note balance of $4,000,000 is presented as a current portion of long term debt on the financials.

 

The GrowCo notes investors also received one GrowCo common stock $1warrant for each $1invested. These warrants expire on April 30, 2020.

 

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 requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees. Due to the past due interest owed to the $4M Note holders, these notes are in technical default.

 

GrowCo Exchange Notes

 

In the first quarter of 2016, GrowCo obtained $300,000 in subscriptions and associated payments in a promissory note offering of up to $1.5 million. In September 2016 GrowCo changed the offering to two series of promissory notes with aggregate principal amounts of up to either $6 million or $7 million, in each case together with warrants to purchase, at a price of $0.25 per share, .25 GrowCo common shares for each dollar invested in the related promissory notes. The initial four investors in the $6 million version of the notes received warrants to purchase one TURV share for each $1.00 invested at a price of $0.50 per share. Of the $300,000 principal of notes issued earlier, $200,000 were exchanged for the new note and warrant packages and $100,000 remain outstanding as of December 31, 2017.

 

During the year ended December 31, 2017, GrowCo raised an additional $1,906,000 under the GrowCo Exchange Notes offering. For the three months ended March 31, 2018, no additional capital was raised through these notes.

 

During the year ended December 31, 2017, the Company incurred $302,000 in debt issuance costs related to its GrowCo Exchange Notes offering. The debt issuance costs are being amortized via the effective interest method, using 22.5%, over the life of the notes.

 

Due to the past due interest owed to the Exchange Note holders, these notes are in technical default.

 

Powderhorn Convertible Note

 

On February 9, 2018, the Company closed a $675,000 promissory note with Powderhorn I, LP. At the option of the Company, monthly payments can be made in cash of $66,150 over a 12 month period, or once an S-1 is deemed effective, in the Company’s common shares a the conversion rate of a discount of 25% of the lowest traded price during the 25 trading days immediately prior to the payment due date. On May 8, 2018, the Company and Powderhorn modified the Note to allow the pending S-1 registration statement to be withdrawn and payments to be made in cash at least through August 9, 2018.

 

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 has been extended to now being due on May 15, 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.

 

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):

 

 

   Three Months Ended March 31, 2018   Three Months Ended March 31, 2017 
   Parent   Farms   Greenhouse   Water   Total   Parent   Farms   Greenhouse   Water   Total 
Revenue  $-   $-   $52   $7   $59   $-   $-   $536   $6   $542 
Less: direct cost of revenue   -    -    -    -    -    -    -    -    -    - 
Gross Margin   -    -    52    7    59    -    -    536    6    542 
Total Operating Expenses   (490)   -    (150)   (230)   (870)   (155)   -    (203)   (170)   (528)
Total Other Income (Expense)   (16)   -    (1,092)   (183)   (1,291)   (72)   -    (402)   (90)   (564)
Net (Loss) from Operations Before Income Taxes   (506)   -    (1,190)   (406)   (2,102)   (227)   -    (69)   (254)   (550)
Income Taxes (Expense)/Credit   -    -    -    -    -    -    -    -    -    - 
Net (Loss) from Operations   (506)   -    (1,190)   (406)   (2,102)   (227)   -    (69)   (254)   (550)
Net (Loss) from Discontinued Operations   -    -    -    -    -    -    (547)   -    -    (547)
Preferred dividends   (493)   -    -    (5)   (498)   (495)   -    (181)   -    (676)
Non-controlling interest   -    -    380    3    383    -    -    57    1    58 
Net (Loss)  $(999)  $-   $(810)  $(408)  $(2,217)  $(722)  $(547)  $(193)  $(253)  $(1,715)
Segment Assets  $717   $-   $9,338   $28,000   $38,056   $1,593   $699   $10,582   $34,126   $47,000 

 

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NOTE 6 – EQUITY TRANSACTIONS

 

The Company has authorized 100,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of March 31, 2018, was 33,124,170 common shares.

 

During the three months ended March 31, 2018, Two Rivers issued 374,250 common stock to Black Mountain for a $100,000 in principle reduction in its Note Payable.

 

During the three months ended March 31, 2018, Two Rivers recognized $373,000 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.

 

Management believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna lease agreement. A court hearing has been set to begin October 16, 2018 in State of Colorado County of Pueblo District Court.

 

Prior board of directors’ litigation

 

On August 8, 2017, a summons was issued in the Arapahoe County District Court on behalf of former board members Dennis Channer, Rockey Wells and John Stroh demanding the Company pay $139,000 in attorneys’ fees owed to Ryley Carlock & Applewhite for services rendered to the former board members at their behest while members of the board. At present, the matter is scheduled for trial in October 2018. The $139,000 is included in our accounts payable on the balance sheet.

 

DFP litigation

 

On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims.

 

GrowCo – Blue Green litigation

 

On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees.

 

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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 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 has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, the Company entered into a stipulation agreement with the State, settling the State’s claims, whereby the Company agreed to take the existing dam structure down to the sediment level by March 31, 2018. The Company has been able to empty all the water in the Dam but was not be able to meet the requirements of the stipulation agreement by March 31, 2018. It anticipates that it will by late 2018. The Company also intends to work with the Colorado State Engineer to construct a new dam close to the prior dam structure, pending financing. Also, as part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. This part of the litigation awaits a trial setting. The State is requesting the Company to pay $100,000 as a penalty for violating the stipulation agreement. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.

 

GrowCo and GrowCo Partners 1, LLC v. Harding and Morris

 

On May 1, 2018, Wayne Harding, our Chief Executive Officer and acting Chief Financial Officer and a member of the Board of Directors, and Samuel Morris Jr., also a member of the Board of Directors, were notified of a complaint filed with the District Court, City and County of Denver, Colorado by (a) GrowCo, Inc. or GrowCo and (b) GCP Super Units, LLC, filing derivatively on behalf of GrowCo Partners 1, LLC or GCP1.

 

GrowCo and GCP1 are considered to be our variable interest entities under U.S. generally accepted accounting principles, which means we are deemed to control them despite not owning a majority of their equity. Because GrowCo and GCP1 are considered to be our variable interest entities, their financial statements are consolidated with ours.

 

Messrs. Harding and Morris serve as the common unit managers of GCP1. The complaint claims that Messrs. Harding and Morris, in serving as such managers:

 

failed to conduct the business affairs of GCP1 in the best interests of GCP1;
engaged in transactions involving conflicts of interest;
usurped business opportunities of GCP1;
engaged in self-dealing and transferred funds and reorganized debt to the detriment of GCP1;
failed to comply with the operating agreement of GCP1;
engaged in unauthorized and improper transactions on behalf of GCP1; and
pursued a scheme to usurp the authority of parties who should be the appropriately appointed managers of GCP1.

 

The complaint also asserts, through derivative claims, that, while serving as GCP1 common unit managers, Messrs. Harding and Morris:

 

breached their fiduciary duties;
received unjust enrichment;
engaged in fraudulent concealment and civil conspiracy; and
failed to conduct the business affairs of GCP1 in the best interests of GCP1.

 

The complaint states that the plaintiffs have suffered economic damages, including loss of profits, in an amount to be determined at the time of trial. Further the complaint is requesting removing Messrs. Harding and Morris from all current positions as managers, and/or officers and/or board member of plaintiff entities.

 

Messrs. Harding and Morris have advised us that they believe that all of the claims made in the complaint are without merit and that they intend to defend vigorously against these claims.

 

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NOTE 8 – DISCONTINUED OPERATIONS

 

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 income from discontinued operations presented in the statements of operations consist of the following for the three months ended March 31, 2018 and March 31, 2017:

 

   March 31, 2018   March 31, 2017 
Revenues  $-   $- 
Cost of goods sold   -    - 
General and administrative expenses   -    88,000 
Depreciation and amortization   -    119,000 
Interest   -    21,000 
Other (gain (loss) on disposal of assets and intangibles)   -    319,000 
Total Loss  $-   $547,000 

 

On March 3, 2017, the Company’s land and water assets associated with farming operations were auctioned off. Gross proceeds from the auction were $1,740,000 with net proceeds of $1,611,000. Proceeds were used to pay off secured debt first with the residual proceeds used to pay unsecured debt.

 

NOTE 9 – 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 $2,217,000 for the three months ended March 31, 2018. At March 31, 2018, the Company had a working capital deficit of $27,000,000 and an accumulated deficit of approximately $99,000,000, respectively. The HCIC seller carry back debt and the GrowCo notes are in technical default. The $4M GrowCo Note is classified as current due to the holders’ right to call the note upon 60-days’ notice. GrowCo has received notification of an entity holding $2,115,000 of this debt of its intent to collect the amount of the note, plus back due interest and attorney fees.

 

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.

 

Since March 31, 2018 to May 11, 2018 the Company has not collected additional capital. The Company is in different stages of discussion with parties interested in providing capital.

 

Additionally, we continue to reduce our general and administrative and cash required for our operations.

 

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NOTE 10 – RELATED PARTY

 

There were no related party transactions during the three months ended March 31, 2018.

 

NOTE 11 – SUBSEQUENT EVENTS

 

Pursuant to ASC 855, management has evaluated all events and transactions that occurred from March 31, 2018 through the date of issuance of these financial statements. During this period, we had the following significant subsequent events:

 

On May 7, 2018, the Company and Powderhorn modified the Note to allow the pending S-1 registration statement to be withdrawn and payments to be made in cash at least through August 9, 2018.

 

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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

 

We have two core businesses: developing greenhouses to lease to cannabis growers and the development of our water assets.

 

Greenhouse Development and Leasing

 

We seek to use our farmland and associated water to create revenue streams. In the past, we had focused on converting, through our Farms operations, farmland and associated water rights to higher-yield, revenue and margin crops. With the legalization of recreational use of marijuana in Colorado in 2012, we identified the potential use of certain of our farmland for lease to licensed marijuana growers. In May 2014, we formed GrowCo, Inc., or GrowCo, to focus and lead our efforts to take advantage of the rapidly growing demand for marijuana. GrowCo initially issued 20,000,000 shares of its common stock to us, and in August 2014 we announced that we were reserving 10,000,000 of those GrowCo shares for distribution to holders of Common Stock as of four record dates (January 1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after a registration statement covering GrowCo common shares has been filed and declared effective, which has not yet occurred.

 

In 2014, we formed our subsidiary, GrowCo, Inc. (“GrowCo”). GrowCo’s focus is to become the number one provider of greenhouses, related infrastructure, and services to growers of cannabis, in states where such activity is legal.

 

In January 2015, GrowCo Partners 1, LLC or GCP1, began fund raising and construction planning activities for the first greenhouse project. The GCP1 greenhouse consists of a 90,000 square foot greenhouse (plus a 1,000 square feet boiler/mechanical room) and a 15,000 square foot processing and warehouse facility on 40 acres of land. Our construction costs for the GCP1 greenhouse totaled $5.3 million. The GCP1 greenhouse was leased to Suncanna, LLC, or Suncanna, with lease payments scheduled to commence as of September 1, 2016. As of December 31, 2015, we had recorded lease receivables of $700,000 and deferred rent of $43,400 in connection with the Suncanna lease arrangements. In 2016, the Suncanna lease arrangement has been the subject of administrative and judicial proceedings:

 

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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, which is currently set for November 14, 2016.
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 $43,400 deferred rent that had been recorded as of December 31, 2016. We also wrote off advances to Suncanna of $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 considering an appeal.

 

Our second greenhouse project will be operated by GrowCo Partners 2, LLC, or GCP2, a consolidated subsidiary of Two Rivers. This project will consist of a 90,000 square foot greenhouse and a 15,000 square foot processing and warehouse facility on 40 acres of land. The GCP2 greenhouse structure was ordered in 2016, construction began in January 2016, and completion is projected for the second half of 2017. Our construction costs for the GCP2 greenhouse totaled $2.8 million through March 31, 2017, and we estimate that an additional expenditure of $3.5 million will be required to complete construction. For a summary of financing activities in connection with the GCP2 greenhouse, please see “—Liquidity and Capital Resources” below.

 

Water

 

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 May 11, 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 May 11, 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    66c**  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 description below regarding pending 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.

 

Two Rivers, 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 has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. We also intend to work with the Colorado State Engineer to construct a new dam close to the prior dam structure, pending financing. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby 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 it will not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018. Two Rivers intends to defend against the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive. A preliminary hearing for some of the defendants was held on May 10, 2018. Another preliminary hearing has been set for June 8, 2018 for the remaining defendants. At the May 10, 2018 hearing it was determined that the State of Colorado can proceed with legal action, which the dates have yet to be set.

 

New Strategic Initiative

 

With our initial marijuana greenhouse projects gaining traction, in the third quarter of 2016 we determined to investigate whether our water assets might have revenue potential of their own, separate from use in irrigating our farmland, that could benefit our stakeholders, including our shareholders and the communities near where our water assets are located. On September 30, 2016, our board of directors established a board-level task force to identify opportunities for our existing water assets, and perhaps acquired water assets. As a result of the success of that investigation, water is a new top-priority for our Company.

 

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.

 

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Results of Operations

 

For the Three Months Ended March 31, 2018, compared to the Three Months Ended March 31, 2017

 

For the year ended December 31, 2016 our revenues were predominantly derived from the activities of our farming business and greenhouse leasing activities. Near the end of 2016 we decided to discontinue our farming operations. Consequently, we have classified our farming financial results on our income and balance sheet statements as Discontinued Operations.

 

During the three months ended March 31, 2018, we recorded revenues of $59,000, compared to $542,000 in the three-month period ended March 31, 2017. The revenues recorded in the three months ended March 31, 2018 was predominantly from our greenhouse operations. Other revenue of $7,000 was from leasing of a property.

 

Operating expenses during the three months ended March 31, 2018 and 2017 were $870,000 and $528,000, respectively. The increase of $342,000 was primarily due to higher legal fees and increase in non-cash stock compensation.

 

Other expenses for the three months ended March 31, 2018 and 2017 were $1,291,000 and $564,000 respectively. The increase of $727,000 is mostly due to the increase of interest expense of $899,000, which some interest was capitalized in 2017, but was not capitalized for the three months ended March 31, 2018.

 

During the three months ended March 31, 2018 and 2017, we recognized a loss from continuing operations of $2,102,000 and $550,000, respectively. For the three months ended March 31, 2018 and 2017, loss from discontinued operations was $-0- and $547,000 respectively.

 

As the result of the foregoing, the net loss attributed to our common shareholders, after recognizing preferred distributions and income attributed to non-controlling interest, for the three months ended March 31, 2018 was $2,217,000, compared to a loss of $1,715,000 for the three months ended March 31, 2016.

 

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 March 31, 2018, we had cash and cash equivalents of $23,000. As of March 31, 2018, we had no available 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 complete our second greenhouse, and seek to monetize our water assets. As a result, our existing cash, cash equivalents and other working capital will 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.

 

As of March 31, 2018, we had $70,000 in current assets and $27,164,000 in current liabilities. Of the current liabilities, $6,301,000 is from seller carry back notes of our subsidiary Huerfano Cucharas Irrigation Company, or HCIC, that were due March 31, 2018, but have not been paid. As of March 31, 2018, we are in default on the HCIC note payments. As a result, the entire amount of the notes has been classified as current.

 

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Additionally, another $4.0 million of GrowCo notes are classified as current liabilities. The notes are due April 1, 2020; however, the holders have the right to request full payment of the principal balance with a 60-day notice. 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 requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees. Due to the past due interest owed to the $4M Note holders, these notes are in default.

 

Additionally, another $6.6 million of GrowCo exchange notes are classified as current liabilities due to the past interest due have not been paid; therefore, are in default.

 

The consolidated financial statements have been prepared assuming the Company will continue as a going concern.

 

Sources of Funds

 

Cash flows generated by our financing activities for the three months ended March 31, 2018 was $388,000 compared to $1,276,000 for the three months ended March 31, 2017. During the three months ended March 31, 2018, we completed our Powderhorn financing and reduced $176,000 in principal on our existing debt.

 

Uses of Funds

 

Cash flow from operations has not historically been sufficient to sustain our operations. Cash flow consumed by our operating activities totaled $344,000 for the three months Ended March 31, 2017 and $1,068,000 for the three months Ended March 31, 2017.

 

Cash used by investing activities was $35,000 for the three months ended March 31, 2018 compared to cash generated by investing activities of $48,000 for the three months ended March 31, 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 May 11, 2018 we have raised $200,000.

 

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.

 

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.

 

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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.

 

Capitalization of Certain Interest Expenses

 

As part of our GrowCo development operations, which began in July 2014, we incur large construction costs, which are capitalized. The related interest expenses incurred related to these expenditures can be capitalized per ASC 720-15. This guidance states that interest should be capitalized in relation to the following assets: (i) assets that are constructed or otherwise produced for an entity’s own use, (ii) assets intended for sale or lease that are constructed or otherwise produced as discrete projects, and (iii) investments accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations. As the GrowCo assets classify under the second point, we began the process of calculating interest costs to be capitalized each quarter. Interest capitalization begins when the expenditures begin and interest is being incurred. Management independently determines the start point for each individual project when it commences. At the end of each quarter, management will then take the average accumulated expenditures for each project, multiplied by the interest rate on the associated debt (or the weighted average rate on all debt if no debt is specifically associated) to arrive at a capitalized interest amount. This amount will be booked as an adjustment to interest expense each quarter. Once the construction process ends and the asset is deemed ready for use, capitalization of interest will cease.

 

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.

 

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 March 31, 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 March 31, 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 March 31, 2018.

 

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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.

 

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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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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.

 

Management believes that this case is without merit and has filed a cross-complaint to recover amounts owed by Suncanna under the Suncanna lease agreement.

 

Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation 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 has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level. Two Rivers has been able to empty all the water in the Dam, but it was not able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018. Two Rivers intends to defend against the sanctions sought in the contempt motion, based in part upon those sanctions being unnecessary and unduly punitive. A hearing has been set for the contempt proceedings on May 10, 2018 and June 8, 2018. The State is requesting the Company to pay $100,000 as a penalty for violating the stipulation agreement. The Company’s engineering firm estimate the cost to breach the dam structure to be between $1.8 to $2.2 million.

 

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.

 

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On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees.

 

On May 1, 2018, Wayne Harding, our Chief Executive Officer and acting Chief Financial Officer and a member of the Board of Directors, and Samuel Morris Jr., also a member of the Board of Directors, were notified of a complaint filed with the District Court, City and County of Denver, Colorado by (a) GrowCo, Inc. or GrowCo and (b) GCP Super Units, LLC, filing derivatively on behalf of GrowCo Partners 1, LLC or GCP1.

 

GrowCo and GCP1 are considered to be our variable interest entities under U.S. generally accepted accounting principles, which means we are deemed to control them despite not owning a majority of their equity. Because GrowCo and GCP1 are considered to be our variable interest entities, their financial statements are consolidated with ours.

 

Messrs. Harding and Morris serve as the common unit managers of GCP1. The complaint claims that Messrs. Harding and Morris, in serving as such managers:

 

  failed to conduct the business affairs of GCP1 in the best interests of GCP1;
  engaged in transactions involving conflicts of interest;
  usurped business opportunities of GCP1;
  engaged in self-dealing and transferred funds and reorganized debt to the detriment of GCP1;
  failed to comply with the operating agreement of GCP1;
  engaged in unauthorized and improper transactions on behalf of GCP1; and
  pursued a scheme to usurp the authority of parties who should be the appropriately appointed managers of GCP1.

 

The complaint also asserts, through derivative claims, that, while serving as GCP1 common unit managers, Messrs. Harding and Morris:

 

  breached their fiduciary duties;
  received unjust enrichment;
  engaged in fraudulent concealment and civil conspiracy; and
  failed to conduct the business affairs of GCP1 in the best interests of GCP1.

 

The complaint states that the plaintiffs have suffered economic damages, including loss of profits, in an amount to be determined at the time of trial. Further the complaint is requesting removing Messrs. Harding and Morris from all current positions as managers, and/or officers and/or board member of plaintiff entities.

 

Messrs. Harding and Morris have advised us that they believe that all of the claims made in the complaint are without merit and that they intend to defend vigorously against these claims.

 

For additional background regarding these actions, please see “ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Overview—Greenhouse Development and Leasing” above.

 

ITEM 1A. RISK FACTORS

 

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.

 

ITEM 6. EXHIBITS

 

The following exhibits are being filed as part of this Form 10-Q:

 

Exhibit
Number
 
Description
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

 

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SIGNATURE

 

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

   

Date: May 14, 2018

By:

/s/ Wayne Harding

    Wayne Harding
    Chief Executive Officer and acting Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit
Number
  Description
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

 

 33 

 

 

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Wayne Harding, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Two Rivers Water & Farming Company;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

 

Dated: May 14, 2018 By: /s/ Wayne Harding
    Chief Executive Officer and acting Chief Financial Officer

 

 

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Two Rivers Water & Farming Company on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Two Rivers Water & Farming Company.

 

Dated: May 14, 2018 By: /s/ Wayne Harding
    Chief Executive Officer and acting Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to
Two Rivers Water & Farming Company and will be retained by Two Rivers Water & Farming Company
and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

 



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