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 September 30, 2015

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)

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).

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes |_| No |X|

As of November 11,2015 there were 26,921,451shares outstanding of the registrant's Common Stock.

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

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

(Unaudited)

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (In Thousands)

(Unaudited)

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TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2015 and September 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, water and into our cannabis-focus business under GrowCo, Inc. The following chart shows our current corporate organization:

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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 computed 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.

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 as GrowCo Partners 1, LLC (GCP 1).  This greenhouse was occupied in October, 2015; however, the tenant agreed to begin lease payments as of September 1, 2015.  Therefore, the cost as of September 30, 2015, is still classified as construction in progress on the balance sheet and depreciation has not begun. As the greenhouse tenant expands its growing operations, the final construction of additional greenhouse bays will be completed.  We anticipate that all of the greenhouse bays will be completed by December 31, 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.

On October 1, 2015, we filed a Form D with the United States Securities and Exchange Commission, for the initiation of a $3.5 million GrowCo equity offering, which proceeds will be used to complete the construction of the first greenhouse, build the second greenhouse and provide working capital.  Subsequently, the Company decided to change this offering to a direct investment in various assets of GrowCo via a Colorado limited liability company, GCP Super Units, LLC.  The September 30, 2015 financial statements show this investment as non-controlling equity in GCP Super Units, LLC.

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), GCP1, and GCP Super Units. Below is the detail of non-controlling interest shown on the balance sheet.

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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.

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.

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.

During the three months ended September 30, 2015, preferred members in TR Capital were granted a non-cash distribution of the Company’s GrowCo Partners 2, LLC common membership units of 497,000 representing a value of $497,000.  The TR Capital board plans to meet on November 13, 2016 to determine if this in-kind distribution will be substituted with a different asset.

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.

Concentration of Risk

ASC 825-10-50-20 requires disclosure of significant concentrations of credit risk regardless of the degree of such risk.  Financial instruments with significant credit risk include cash deposits.  The amount on deposit with one financial institution exceeded the $250,000 federally insured limit as of September 30, 2015.  However, management believes that the financial institution is financially sound and the risk of loss is minimal.

Customers

For the nine months ending September 30, 2015, we have sold farm products to 17 customers.  One customer represents 29% of our sales and two customers combined represent a total of 28% of our sales.

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Accounts Receivable

As of September 30, 2015 our farm accounts receivable of $849,000 consisted of one customer representing 45% of the balance, two other customers representing 18% and 10% of the balance, and the remaining customers each having 8% or less of the balance.

As of September 30, 2015 our tenant receivable of $175,000 is from our sole tenant in the first greenhouse.  According to the terms of the lease, this tenant has until the completion and sale of its first cannabis harvest to begin making payments for the lease.  We expect this to occur in March, 2016.  As of September 30, 2015, we have not established a reserve for any non-payment by the tenant.

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.  Management estimates the cost of the revenue based on projections of gross profit margins, which is currently 80% of farm product.  Each calendar quarter, management evaluates farm product to ascertain that it is represented at lower of cost or market.  

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 3 to 27.5 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:

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 September 30, 2015 we have capitalized $320,000 representing the 12% preferential return as a cost of the GCP1 greenhouse construction.

Additionally, $937,000 of the $4,000,000 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.  As of September 2015, the capitalization of these costs terminated.

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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 (see 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 record a reduction to the fair value.

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.  Once per year, Management will assess the value of water rights and infrastructure, and in their opinion, if the land has become impaired, Management will record a reduction to the fair value.

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.  Once per year, Management will assess the value of intangibles, and in their opinion, if the land has become impaired, Management will record a reduction to the fair value.

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.  The Company has reserved, as a reserve for sales returns, $10,000 for any potential load rejection.  Management does not believe a reserve against uncollectable farm revenue is necessary due to the Company’s long standing relationships with its customers.

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.

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.  

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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 September 30, 2015, has not been included in the determination of diluted earnings per share since, under ASC 260 they would be anti-dilutive.

Recently Issued Accounting Pronouncements

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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 record a reduction to the fair value. 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:

The Company estimates an additional expenditure of $475,000 is required for the completion of the GCP1 greenhouse. Occupancy occurred in October, 2015, with the tenant paying rent on the entire structure effective September 1, 2015.  Construction continues on various greenhouse bays in advance of the tenant expanding to those bays for its growing operations. Construction in progress includes approximately $900,000 for construction of the second greenhouse, including the sharing of infrastructure cost with the first greenhouse.

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NOTE 4 – NOTES PAYABLE

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 September 30, 2015 and December 31, 2014, the total debt discount was $186,000 and $350,000, respectively. The GrowCo $88,000 note discount as of September 30, 2015 is being amortized using the straight line method over the 5 year life of the note.

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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 September 30, 2015, was 26,835,451 common shares.

During the nine months ended September 30, 2015, the Company had the following common stock transactions:

·

In February, the Company issued 130,833 shares to its independent board members for 2014 service.

·

For the three months ended September 30, 2015, the Company issued the following common stock:

o

118,720 shares to holders of TR Capital for conversion into the Company shares;

o

59,360 shares to a holder of F-2 Preferred Shares who converted into the Company shares; and

o

2,000 shares to a consultant for work performed in 2014.

During the nine months ended September 30, 2014, the Company had the following common stock transactions:

·

In May, the Company issued the following common stock:

o

30,000 shares to a prior employee under our stock plan; and

o

50,000 shares to a consultant for work performed in 2014.

·

In June, the Company issued the following common stock:

o

833,334 shares under our stock plan; and

o

142,500 shares to the independent members of the Board of Directors in exchange for Board services rendered in 2013.

·

In July, the Company issued the following common stock:

o

237,440 shares as a conversion from F-2 Preferred Shares;

o

166,667 shares to an employee under an RSU grant; and

o

4,000 shares to a consultant.

·

In August, the Company issued 121,688 shares as a conversion from F-2 Preferred Shares.

·

In September, the Company issued 59,360 shares as a conversion from F-2 Preferred Shares.

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Our core business converts irrigated farmland from traditional use to grow marginally profitable feed crops to use for growing fruit and vegetable crops that generate higher yield, revenue and operating margins.  In the short-term, our business model is designed to provide us with increased profitability and cash flow that is enabling us to expand our farming operations by acquiring and developing additional irrigated farmland and associated water rights and infrastructure.  In the longer term, we believe our ability and willingness to pay a higher price for water will increase our access to water, as third parties leasing to us additional water rights that can be used not only for profitable farming operations, but also for provision to municipalities to address their supply challenges.  We seek to concentrate our acquisitions on water rights and infrastructure that are, in part, owned by municipalities, which can alleviate and expedite the legal and political processes necessary for municipal consumers to obtain excess water.  

In 2014 we farmed a total of 799 gross acres, of which 679 gross acres were planted and 120 acres were the subject of federal crop insurance payments attributable to drought conditions. We intend to develop and bring into production more of our currently held gross acres as we acquire additional water rights.  Our crop production consisted of cabbage, pumpkins and squash grown for human consumption, as well as feed crops, such as alfalfa, corn, oats and sorghum, planted as part of our crop rotation practice.  

In 2014 we initiated a corporate restructuring pursuant to which are organizing substantially all of our operations under the control of TR Capital Partners, LLC, or TR Capital.  This restructuring better reflects our emphasis on acquiring and operating irrigated farming and water distribution activities under our integrated business model.  TR Capital issued all of its common units to the Parent Company and, as of March 20, 2015, had issued a total of 30,192,000 preferred units in exchange for aggregate consideration consisting of $6.0 million in cash and $18.9 million of outstanding equity securities of certain of our subsidiaries.  

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Results of Operations

Our Consolidated Operations

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

During the three months ended September 30, 2015 and 2014 we recognized revenues of $1,685,000 compared to $1,072,000, in the three-month period ended September 30, 2014.  Our primary revenue source is from the sale of agriculture products grown by us.  The sale of these products is highly seasonal and occurs primarily in the third and fourth quarter of the year.  The increase of $613,000 is primarily due to an increase in our farm acreage production increasing farm revenue by $435,000 and the beginning of rent of the first greenhouse of $175,000.

Our direct cost of revenue was $1,174,000 compared to $786,000 for the three months ended September 30, 2015 and 2014, respectively.  This produced a gross margin $510,000 compared to $286,000 for the three months ended September 30, 2015 and 2014, respectively.  The increase in gross margin is due to the increase of farm revenue and the beginning of the greenhouse lease.  Since the lease is a “triple-net” lease, there was no direct costs of the lease revenue.

Operating expenses during the three months ended September 30, 2015 and 2014were $607,000 and $831,000, respectively.  The decrease of $224,000 is primarily due to a management’s continued cost containment efforts and some reclassifications of farming general and administrative into the direct cost of farming revenue. Therefore, for operations, during the three months ended September 30, 2015 and 2014, we recognized a net loss of $97,000 and $545,000, respectively.  

Our non-operating expenses increased to $335,000 from $315,000 for the three months ended September 30, 2015 and 2015, respectively.  The increase of $20,000 is primarily due to an increase of interest expense.

For the three months ended September 30, 2015 and 2014, we recognized a net loss of $1,141,000 and $1,339,000, respectively.  The decreased loss of $198,000 is due to the factors mentioned above and partially offset by an increase of preferred dividends of $229,000.

For the Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

During the nine months ended September 30, 2015, we recognized revenues from continuing operations of $1,726,000, as compared to $1,087,000 in revenues during the nine months ended September 30, 2014.  Our primary revenue source is from the sale of agriculture products grown by us. The sale of these products is highly seasonal and occurs primarily in the third and fourth quarter of the year.  The increase of $639,000 is primarily due to an increase in our farm acreage production increasing farm revenue by $457,000 and the beginning of rent of the first greenhouse of $175,000.

Our direct cost of revenue was $1,195,000 compared to $786,000 for the nine months ended September 30, 2015 and 2014, respectively.  This produced a gross margin of $531,000 compared to $301,000 for the nine months ended September 30, 2015 and 2014, respectively.

Operating expenses from operations during the nine months ended September 30, 2015 and 2014 were $1,612,000 and $2,924,000, respectively.  The decrease of $1,312,000 is primarily due to management’s continued cost containment efforts and some reclassifications of farming general and administrative into the direct cost of farming revenue. Therefore, for operations, during the nine months ended September 30, 2015 and 2014, we recognized a net loss of $1,081,000 and $2,623,000, respectively.  

For the nine months ended September 30, 2015 and 2014, we recognized a net loss of $3,698,000 and $4,772,000, respectively.  The decreased loss of $1,074,000 is due to the factors mentioned above and partially offset by an increase of preferred dividends of $628,000.

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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.

As of September 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 September 30, 2015, we had cash and cash equivalents of $510,000. Cash flow consumed by our operating activities totaled $2,998,000 for the nine months ended September 30, 2015,compared to operating activities consuming $3,512,000 for the nine months ended September 30, 2014. The decrease in the cash consumed by our operating activities is largely due to the reduction of our loss from operations.

As of September 30, 2015, we had $2,789,000 in current assets and $9,473,000 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 $4,396,000 for the nine months ended September 30, 2015 compared to $1,564,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we continued construction on our first greenhouse and ordered the structure for our second greenhouse for a total investment of $4,057,000.  Additionally, we purchased $158,000 in farming equipment and $181,000 for land and additional water rights.

Cash flows generated by our financing activities for the nine months ended September 30, 2015 was $5,970,000 compared to $3,769,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we completed our GrowCo Partners 1, LLC offering for $1,249,000, closed on $4,000,000 of GrowCo debt, began our offering of GCP Super Units offering raising $1,275,000,offset by cost of the offerings of $374,000 and principal reductions of $244,000.

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 consolidated financial statements included elsewhere in this Form 10-Q.  Our preparation of such 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

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the reported amounts of revenue and expenses during the reporting period.  There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

We follow specific and detailed guidelines in measuring revenue; however, certain judgments may affect the application of our revenue policy.  Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Goodwill and Intangible Assets

We have acquired water shares in Huerfano-Cucharas Irrigation Company, which is considered an intangible asset and shown on our balance sheet as part of “Water assets”.  Currently, these shares are recorded at purchase price less our pro rata share of the negative net worth in HCIC Holdings, LLC.  Management evaluates the carrying value, and if necessary, will establish an impairment of value to reflect current fair market value.  Currently, there are no impairments on the water shares.

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.

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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.

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assessment, management concluded that, as of September 30, 2015, our internal control over financial reporting was effective based on those criteria.

The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December  31, 2014, 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.

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