| Note 2 - Summary of Significant Accounting Policies | 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. 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 of 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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. It is suggested that these condensed consolidated financial statements be read in conjunction with the Companys consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 25, 2016. Non-controlling Interest Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets. September 30, 2016 December 31, 2015 TR Capital $ 20,588,000 $ 20,588,000 HCIC 1,382,000 1,375,000 Two Rivers Farms F-1, Inc. 29,000 29,000 Two Rivers Farms F-2, Inc. 162,000 162,000 Dionisio Farming and Produce, Inc. 452,000 452,000 GrowCo Partners 1, LLC 3,521,000 3,521,000 GCP Super Units, LLC 4,923,000 3,828,000 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 - Totals $ 32,509,000 $ 30,912,000 In 2015, $152,000 of TR Capital Preferred Membership units were exchanged, pursuant to a pre-existing exchange agreement, for Two Rivers common shares and $60,000 of Two Rivers Farms F-2, Inc. (F-2) membership units converted into Two Rivers common shares. Two Rivers also formed three LLC special entities (TR Cap 20150630 Distribution, TR Cap 20150930 Distribution, and TR Cap 20151231) to provide in-kind distributions totaling $1,452,000 to holders of TR Capital Preferred Membership units. 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. Farm Product Farm product represents expenses directly attributed to the planting and cultivation of the crops. Upon harvesting, the farm product is reduced in proportion to the revenue generated. The reduction of the farm product is recognized as direct cost of revenue. Based on the current year crop plan gross margin is estimated to be 15%. This gross margin percentage (15%) is used to estimate the direct cost of farm revenue for the interim periods along with the amount of farm product recognized on the balance sheet. For the nine-month period ending September 30, 2015, management estimated gross margin to be 20%. It is managements estimate that the farm product is recorded at lower of cost or market. Lease Revenues The lease between GrowCo (through its subsidiary, GCP1) and its related party lessee, Suncanna, was classified as an operating lease. Under ASC 840-10-25-1(a), Lease Classification Criteria For the period September 1, 2015 through December 31, 2015, Lease Revenue Related Party was recognized monthly at the end of each month. Total lease payments under the 60-month lease agreement, which are $11,151,000, are divided by the lease term. Therefore, the average lease rate per month is $186,000. This spreads the total amount of the lease payment stream over the life of the lease. As of December 31, 2015, we had advanced $203,000 to our then related party tenant, Suncanna, to assist with its working capital. ASC 605-45-45, Revenue RecognitionPrincipal Agent Considerations, On April 14, 2016, we received notice from the Marijuana Enforcement Division of the Colorado Department of Revenue that Suncanna had received a suspension order. This caused Suncanna to be in violation of its lease with GCP1. Therefore, GCP1 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. The total write off of $1.330 million is partially off-set by a $350,000 reduction in the amount owed to the GCP1 preferred unit holders. On July 22, 2016 the Companys GrowCo subsidiary, GrowCo Partners 1, LLC received a court ordered Writ of Restitution from the Pueblo County Colorado District Court ordering Suncanna, the Companys then tenant in its marijuana-focused greenhouse, to vacate the greenhouse by September 6, 2016. On September 6, 2016 the Company took possession of the greenhouse and began re-conditioning it for the new tenant who is expected to begin growing operations in November 2016. 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 September 30, 2016 December 31, 2015 Office equipment, furniture 5 7 $ 11,000 $ 11,000 Computers 3 47,000 45,000 Vehicles 5 116,000 45,000 Farm equipment 7 10 1,850,000 1,807,000 Irrigation system 10 995,000 995,000 Buildings 27.5 402,000 393,000 Website 3 7,000 7,000 Subtotal 3,428,000 3,303,000 Less: Accumulated depreciation (1,724,000) (1,354,000) Net book value $ 1,704,000 $ 1,949,000 Land Land acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore, additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land ( Property and Equipment Water Rights and Infrastructure Subsequent to purchase of water rights and water infrastructure, 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 is a $30,000 impairment reserve on the Companys land and water shares. No amortization or depreciation is taken on the water rights. Intangibles Two Rivers recognizes the estimated fair value of water rights acquired by the Companys 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 Farm Revenues Revenues from farming operations are recognized when sold into the market. All direct expenses related to farming operations are capitalized as farm inventory and recognized as a direct cost of sale upon the sale of the crops. Shipping costs invoiced to customers are shown as farm revenue. Shipping costs paid by the Company are shown in the direct cost of farm revenue. Member Assessments Once per year the HCIC board estimates HCICs expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by Two Rivers Water Company to HCIC are eliminated in consolidation of the condensed consolidated financial statements. The assessments that are not eliminated are included in Other revenue. HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the members ownership of HCIC. The value of this ownership is significantly greater than the annual assessments. Stock Based Compensation Beginning January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Net (Loss) per Share Basic net loss per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period. The dilutive effect of the outstanding 489,000 RSUs, 3,879,867 options, and 17,802,908 warrants at September 30, 2016, 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 May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers Revenue Recognition In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern Presentation of Financial Statements Going Concern In April 2015, FASB issued ASU 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In February 2016, FASB issued a new lease accounting standard, ASU 2016-02, Leases 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. |
