The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations  (In Thousands, except Per Share Data)

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (In Thousands)

(Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements.

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2015 and June 30, 2014

(Unaudited)

NOTE 1 – ORGANIZATION AND BUSINESS

The following is a summary of some of the information contained in this document.  Unless the context requires otherwise, references in this document to “Two Rivers,” or the “Company” is to Two Rivers Water & Farming Company and its subsidiaries.

Corporate Evolution

On January 29, 2014, the board of directors approved a plan to reorganize our subsidiaries in a more integrated manner based on functional operations.  We formed a new company, TR Capital Partners, LLC or TR Capital, which issued all of its common units to Two Rivers Water & Farming Company.  Two Rivers then initiated the transactions whereby our direct and indirect subsidiaries entered into a series of related transactions as the result of which assets and operations of subsidiaries transferred to TR Capital.  As a result of those transactions, TR Capital operates all of the operations formerly conducted by those subsidiaries, and we classify TR Capital as Two Rivers Water & Farming Company.  Two Rivers has divided its operations into our traditional lines of business of farming and water and into our cannabis-focus business under GrowCo, Inc. The following chart shows our current corporate organization:

Overview

In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure.  As of June 30, 2015, we own 7,350 gross acres. We will seek to expand our holdings by strategically acquiring or leasing irrigable farmland in the Arkansas River Basin.  We intend to develop and bring into production more of our currently held gross acres as we acquire additional water rights.  We also expect to increase the variety of crops we produce as we continue to expand.

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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 for GrowCo for these specific dividend shares.  On each record date we will compute the amount of GrowCo common shares to distribute base 2,500,000 GrowCo common shares on a prorata basis of shares owned of Two Rivers’ common shares.

Under GrowCo, a separate Colorado limited liability company will own each greenhouse project.  On January 20, 2015 we announced that we completed the funding ($4.4 million) for the first greenhouse project consisting of a 91,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land.  The greenhouse and facility has been pre-leased.  This funding and project is referred to GrowCo Partners 1, LLC (GCP 1).  We expect this greenhouse to be completed and occupied by September 2015.  

On July 20, 2015, we announced and filed a Form D with the United States Securities and Exchange Commission, for the completion of a $4 million GrowCo debt offering, which proceeds will be used to build the second greenhouse and provide working capital.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying 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.

Non-controlling Interest

Non-controlling interest is recorded for the ownership of subsidiaries not owned by the Company, which includes TR Capital, the Huerfano Cucharas Irrigation Company (HCIC), Two Rivers Farms F-1, Inc. (F-1), Two Rivers Farms F-2, Inc. (F-2), Dionisio Farms and Produce, Inc. (DFP), and GCP1. Below is the detail of non-controlling interest shown on the balance sheet.

During the year ended December 31, 2014, investors in F-1, F-2, the Company’s preferred shares, ASF convertible notes, DFP preferred shares, Ellicott second mortgage, and the new cash investments of $6,000,000 were given the opportunity to convert into TR Capital Partners, LLC and were issued 30,192,000 TR Capital Preferred Membership units, with a NCI value of $20,740,000.

During the three months ended March 31, 2015, preferred members in TR Capital were granted a non-cash distribution of the Company’s GrowCo Partners 1, LLC preferred membership units of $499,000.  The Company issued GrowCo Partners 1, LLC preferred membership units to outside investors of $3,088,000.

During the three months ended June 30, 2015, preferred members in TR Capital were granted a non-cash distribution of the Company’s GrowCo Partners 1, LLC preferred membership units of $499,000.  The Company issued GrowCo Partners 1, LLC preferred membership units to outside investors of $3,088,000.

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The 30,192,000 TR Capital Preferred Membership units issued during the year ended December 31, 2014 are convertible into one common stock share of the Company and one-half warrant to purchase a share of stock of the Company at $2.10 per share.  In accordance with ASC Topic 470-20, Debt (and other convertible instruments with beneficial convertible features (“BCF”), the Company determined that a BCF amounting to approximately $12,337,000 and a relative fair value attached to the warrants of approximately $3,641,000 were recorded for the year ended December 31, 2014.  On the accompanying balance sheets as of December 31, 2014, these amounts were recorded as retained earnings and as additional paid in capital, respectively, and are representative of preferred share dividends available to non-controlling interest holders in the entity.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ materially from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company 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 of the revenue generated.  The reduction of the farm product is recognized as direct cost of revenue.

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:

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Capitalization of interest costs and certain labor expenses

Holders of GrowCo Partners 1, LLC preferred membership units receive a 12% per annum preferential return on their investment.  In accordance with ASC 835-20 Interest – Capitalization of Interest, through June 30, 2015 we have capitalized $220,000 representing the 12% preferential return as a cost of the GCP1 greenhouse construction.

Additionally, $937,000 of the $3,785,000 GrowCo Note funds were used for water right purchases and the down payment for the second greenhouse.  Therefore, $20,000 in interest costs were capitalized to construction in progress during the three months ended June 30, 2015.

Further, we have capitalized $16,000 in internal labor costs to the cost of construction of our first greenhouse.  Once the greenhouse receives a certificate of occupancy, expected in September 2015, the capitalization of these costs will terminate.

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 above). Land is not depreciated.  However, once per year, Management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.

Water rights and infrastructure

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

Intangibles

Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in HCIC and 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.

Water Revenues

Current water revenues are from the lease of water own by HCIC to farmers in the HCIC service area and through re-leasing of our water from the Pueblo Board of Water lease.   Water revenues are recognized when the water is consumed.

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.

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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 Income (Loss) per Share

Basic net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period.  Diluted net income (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 2,455,948 RSUs, 2,014,867 options, and 17,802,908 warrants at June 30, 2015, has not been included in the determination of diluted earnings per share since, under ASC 260 they would be anti-dilutive.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. Management has determined that this pronouncement will not have a material impact on our consolidated financial statements.

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.  At least quarterly, management formally assesses the Company’s ability to remain a going concern.

The Company elected to adopt early FASB ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, whereby debt issuance costs are recorded as a deduction

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from the carrying value of liability, and not recorded as an asset.  The debt issuance costs are amortized using the effective interest method.

Management does not believe that any other recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying consolidated financial statements.

NOTE 3 – INVESTMENTS AND LONG-LIVED ASSETS

Land

Upon purchasing land, the value is recorded at the purchase price or fair value, whichever is more accurate.  Costs incurred to prepare the land for the intended purpose, which is efficient irrigated farming, is 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.

Upon purchasing water rights, the value is recorded at the purchase price.  If a majority interest is acquired in a company holding water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines the fair value of the assets.  To assist with the valuation, the Company may consider reports from a third-party valuation firm.  If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized.   If the value of the water assets are less than what the Company paid then goodwill is recognized.

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 and Second Greenhouse Construction in Progress

The Company has commenced the construction of its first greenhouse (91,000 square feet) and related warehouse facilities (15,000 square feet) and placed an order with a down payment for the second greenhouse. These costs are capitalized, and not amortized or depreciated until construction is completed in accordance with ASC 360 and 835.  

Construction costs are as follows:

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The Company estimates an additional expenditure of $475,000 is required for the completion of the GCP1 greenhouse.  Construction in progress includes approximately $900,000 for construction of the second greenhouse, including the sharing of infrastructure cost with the first greenhouse.

Below is a summary of the Company’s consolidated long term debt:

Notes:

(1)

Prime +1.0%, but not less than 6.0%

(2)

Prime + 1.5%, but not less than 6.0%

The Company elected to adopt early FASB ASU 2015-03, 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 June 30, 2015 and December 31, 2014, the total debt discount was $331,000 and $350,000, respectively.

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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 farming, greenhouse operations (GrowCo) and water with Two Rivers Water & Farming Company as the Parent company.  Therefore, we report our segments by these lines of businesses: Farms, Greenhouse and Water.  Farms contain all of our Farming Business (Farms, F-1, F-2, Dionisio).  Greenhouse contains our development and leasing of greenhouses to cannabis growers and related business services.  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.  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):

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NOTE 7 – EQUITY TRANSACTIONS

Common Stock

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 June 30, 2015, was 26,655,371 common shares.

During the three months ended March 31, 2015 the Company issued 130,833 shares to the independent members of the Board of Directors for services performed in 2014.

During the six months ended June 30, 2014, the Company had other common stock transactions.

NOTE 8 – SUBSEQUENT EVENTS

Pursuant to ASC 855, management has evaluated all events and transactions that occurred from June 30 , 2015 through the date of issuance of these financial statements.  During this period, we had one significant subsequent events.

On July 20, 2015, we announced and filed a Form D with the United States Securities and Exchange Commission, for the completion of a $4 million GrowCo debt offering, which proceeds will be used to build the second greenhouse and provide working capital.

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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.  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

In 2015 we have planted, or plan to plant, a total of 809 acres and 159 acres being preventative planted.  We anticipate our first greenhouse (GCP1) will be occupied in September, 2015.  We anticipate our second greenhouse to be occupied in March or April, 2016.  GCP1 has 91,000 square feet of greenhouse and a 15,000 square foot warehouse.  Our second greenhouse will be 90,000 square feet, will share the boiler facilities in the first greenhouse and will share the use of the 15,000 square foot warehouse.

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Results of Operations

Our Consolidated Operations

For the Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

Due to the nature of our farming business for the three months ended June 30, 2015 we recognized diminutive revenuesof $22,000 from farming and $20,000 from other sources, largely from farm and pasture leases.  For the first time in several years, our farming operations began shipping in late June.  

For the three months ended June 30, 2014 we had no farming revenues and $10,000 from member assessments.

Operating expenses during the three months ended June 30, 2015 and 2014 were $515,000 and $1,129,000, respectively. The decrease of $614,000 was primarily due toincreasing the amount of farming inputs that we capitalized to farm product and management’s cost containment efforts.   Therefore, during the three months ended June 30, 2015 and 2014, we recognized a loss from operations of $494,000 and $1,119,000, respectively.

Other expenses for the three months ended June 30, 2015 and 2014 were $263,000 and $379,000.  The decrease of $116,000 was largely due to a gain recognized of $101,000 from the transfer of land owned by the Company back to the original seller in exchange for a promissory note and accrued interest forgiveness.

After recognizing the preferred distributions and the income attributed to non-controlling interest, the net loss attributed to Two Rivers’ common shareholders for the three months ended June 30, 2015 was $1,178,000, compared to a loss of $1,680,000 for the three months ended June 30,2014. The decrease of $502,000 is due primarily to the reasons stated above, offset in part by declared distributions to TR Capital.

For the Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

As previously mentioned, due to the nature of our farming business for the six months ended June 30, 2015 we recognized diminutive revenuesof $22,000 from farming and $20,000 from other sources, largely from farm and pasture leases.  For the first time in several years, our farming operations began shipping in late June.  

For the six months ended June 30, 2014 we had no farming revenues and $15,000 from member assessments.

Operating expenses during the six months ended June 30, 2015 and 2014 were $1,005,000 and $2,092,000, respectively. The decrease of $1,087,000 was primarily due toincreasing the amount of farming inputs that we capitalized to farm product and management’s cost containment efforts.   Therefore, during the six months ended June 30, 2015 and 2014, we recognized a loss from operations of $984,000 and $2,077,000, respectively.

Other expenses for the six months ended June 30, 2015 and 2014 were $524,000 and $703,000.  The decrease of $179,000 was largely due to a gain recognized of $101,000 from the transfer of land owned by the Company back to the original seller in exchange for a promissory note and accrued interest forgiveness.

After recognizing the preferred distributions and the income attributed to non-controlling interest, the net loss attributed to Two Rivers’ common shareholders for the six months ended June 30, 2015 was $2,556,000, compared to a loss of $3,432,000 for the six months ended June 30,2014. The decrease of $876,000 is due primarily to the reasons stated above, offset in part by declared distributions to TR Capital.

Liquidity and Capital Resources

We have funded our operations primarily from the following sources:

·

equity proceeds through private placements of Two Rivers Water & Farming Company and subsidiaries securities;

·

revenue generated from operations, and

·

loans and lines of credit.

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As of June 30, 2015, we had no available line or letters of credit and do not intend to seek any such financing in the foreseeable future.

Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital.  As of June 30, 2015, wehad cash and cash equivalents of $1,260,000. Cash flow consumed by our operating activities totaled $2,027,000 for the six months ended June 30, 2015,compared to operating activities consuming $2,938,000 for the six months ended June 30, 2014. The decrease in the cash consumed by our operating activities islargely due to the reduction of our loss from operations.

As of June 30, 2015, we had $2,658,000 in current assets and $8,668,000 in current liabilities. A large portion of the current liabilities ($6,838,000) is from the HCIC seller carry back notes, that are due June 30, 2016.  It is management’s intension to offering existing note holders the opportunity to extend their notes and for those note holders not wishing to extend, obtain financing to pay the notes.  The seller carry back notes have the HCIC ditch system as collateral, with an appraised value of $24,216,000.

Cash used in investing activities was $3,269,000 for the six months ended June 30, 2015 compared to $513,000 for the six months ended June 30, 2014. During the six months ended June 30, 2015, we continued construction on our first greenhouse and ordered the structure for our second greenhouse for a total investment of $2,939,000.  Additionally, we purchased $149,000 in farming equipment and $181,000 for additional water rights.

Cash flows generated by our financing activities for the six months ended June 30, 2015 was $4,622,000 compared to $3,250,000 for the six months endedJune 30, 2014. During the six months ended June 30, 2015, we complete our GrowCo Partners 1, LLC offering for $1,249,000, closed on $3,785,000 of GrowCo debt offset by cost of the offerings of $255,000 and principal reductions of $221,000.

We currently expect that our cash expenditures will increase for the foreseeable future, as we seek to further expand our farmland business and to initiate operations of GrowCo.  As a result, our existing cash and cash equivalents and other working capital may not be sufficient to meet all of the projected cash needs contemplated by our business strategies for the remainder of 2015 and for 2016.  To the extent our cash and 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 effect 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.

Critical Accounting Policies

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.

In 2012, we acquired a produce business, which is considered an intangible asset and shown on our balance sheet as “Intangible assets, net”.   Management evaluated the purchase price of $1.0 million and allocated this price to customer list, trade name and goodwill.

Capitalization of Certain Interest Expenses

As part of our GrowCo development operations, which began in July 2014, the Company began to incur large construction costs, which are capitalized.  The related interest expenses incurred related to these expenditures can be capitalized as well per ASC 835-20 Interest – Capitalization of Interest.  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, the Company 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.  

Inflation

We do not believe that inflation will have a material negative impact on our operations in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and change in the market values of our real estate properties and water assets.  Because we had no market risk sensitive instruments outstanding as of June 30, 2015, 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 and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015.  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

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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.  Disclosure controls and procedures include, without limitation, controls and procedures 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 accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.  Based on this evaluation, our management concluded that as of March 31, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual 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.

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.

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.  Based on this assessment, management concluded that, as of June 30, 2015, our internal control over financial reporting was effective based on those criteria.

Changes in Internal Control over Financial Reporting

Since the year ending December 31, 2014 we have had no changes in our internal controls over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1A.  RISK FACTORS

ITEM 6.   EXHIBITS

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

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.

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EXHIBIT INDEX

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