UNIted StatesUNITED STATES

SeCURITIESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

For the transition period from _____ to _____

000-51139

(Commission file number: 000-51139number)

Two Rivers Water & Farming Company

(Exact Namename of Registrantregistrant as Specifiedspecified in Its Charter)its charter)

3025 S. Parker Road, Suite 140, Aurora, CO 80014

(Address of principal executive offices) (Zip Code)

(303) 222-1000

(Registrant’s telephone number, including area code:(303) 222-1000code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 fileFile 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One).

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

Yes [  ] No [X]

AsIndicate the number of November 9, 2018 there were 43,347,967 shares outstanding of each of the registrant’s Common Stock.issuer’s classes of common stock, as of the latest practicable date:87,145,235 shares as of November 22, 2019.

TABLE OF CONTENTS

PART I.1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except for number of shares)

(Unaudited)

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In Thousands, except Per Share Data)

(Unaudited)statements

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash FlowsOperations

(In Thousands)thousands, except for number of shares)

(Unaudited)

Continued on next page

Continued from previous page

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCondensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2018 and September 30, 2017(In thousands)

(Unaudited)

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)

(Unaudited)

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

NOTE 1 – ORGANIZATION AND BUSINESS

Unless the context requires otherwise, references in these notesthis document to “Two Rivers,” or the “Company,” “we,” “our,” “us” and similar terms are“Company” is to Two Rivers Water & Farming Company and its subsidiaries.

Corporate Evolution

InPrior to 2009, the Company was named Navidec Financial Services, Inc. (“Navidec”) and had been engaged in mortgage lending and other enterprises unrelated to its current lines of business. Navidec was incorporated in the state of Colorado on December 20, 2002. On July 28, 2009, Navidec formed a wholly-owned Colorado corporation for the purpose of acquiring farm and water assets in the Colorado Huerfano/Cucharas watershed. On November 19, 2009, with shareholder approval, Navidec changed its name to Two Rivers Water Company. On December 11, 2012, with shareholder approval, the Company changed its name to Two Rivers Water & Farming Company.

On January 29, 2014, wethe 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,Capital. TR Capital then initiated the transactions described below under “Placement of Preferred Units”. Following the completion of those transactions in September 2014, TR Capital and our other direct and indirect subsidiaries (excluding HCIC Holdings, LLC and Huerfano-Cucharas Irrigation Company) entered into a series of related transactions as the result of which assets and operations of thosesuch other subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital operates or controlsowns 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.subsidiaries.

Overview

In 2009, we began acquiring and developing irrigated farmland and associated water rights and infrastructure. As of September 30, 2018,2019, we own 6,430approximately 7,076 gross acres. Gross acres owned decreasedshowed a net increase of 811 acres from 6,5386,265 gross acres at December 31, 20172018 due to the saleaddition of 108 acres.acreage owned by Huerfano Cucharas Irrigation Company that was previously not reported.

We are focused on water assets we have acquired and will potentially 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 ourthe name Two Rivers Water Farming & Water Company.Rivers. Our water assets are located in a basin thatasset area spans over 1,5001,900 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, weWe 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.assets through asset sales and reinvestment. We have determinedplan to sell assets that we have determined will not yield significant future returns to our shareholders and invest strategically in the assets that we believe will. We willplan to take net proceeds, if any, from these sales and continue to invest in our water and water infrastructure.

In May 2014, we formed GrowCo, Inc., a wholly owned subsidiary of Two Rivers through the issuance of 20,000,000 shares of common stock. On August 1, 2014, we announced that we were placing 10,000,000 GrowCo shares in a trust to be distributed to Two Rivers’ common shareholders. As of March 31,June 30, 2018, the Company owned 10,000,000 GrowCo shares out of reported shares outstanding of 34,343,000, or 29.12%. The reported outstanding shares were provided to the Company by GrowCo’s management.

The Company requested from GrowCo management financial information to complete the Company’s June 30, 2018 financials. On July 17, 2018 the Company was notified by GrowCo’s management that GrowCo willwould not provide the requested financial information. This event triggered the Company’s management to re-examine the consolidation and VIE (variable interest entity) rules under US GAAP. Management concluded that as of April 1, 2018 the consolidation of GrowCo and GrowCo’s related entities iswas no longer required under US GAAP.

Water Redevelopment Company

We formed Water Redevelopment Company (“Water Redev”) in February 2017 for the purpose of separating our water assets from the rest of our business and to enablefacilitate raising additional raising of capital for the purpose of investingto invest 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 firstprimary area of focus is in the Huerfano-Cucharas river basin in southeastern Colorado. Although no final decision has been reached, we are considering various alternatives and proposals for financing and restructuring Water Redev including a spin-off to shareholders, direct funding and partial or full rights sales.

Vaxa Entities

On July 31, 2019, Two Rivers completed its acquisition of a 100% interest in Vaxa Global, LLC and its two wholly-owned subsidiaries, Ekstrak Labs, LLC and Gramz Holdings, LLC (together the “Vaxa Entities”), from Easby Land & Cattle Company, LLC, in exchange for 30,000,000 Two Rivers’ common shares plus an additional 20,000,000 Two Rivers’ common shares subject to an earn-out performance by the Vaxa Entities over a 12 month period. The number of earn-out shares will equal the lesser of:

It is expected that the earn-out shares, if any, would be issued by August 2020.

We intend to expand Vaxa’s operations to grow hemp on land that we own, using water that we supply. This will, in turn, provide additional hemp products to Ekstrak and Gramz™.

In September 2019, Vaxa entered into an agreement to purchase over $700,000 in extraction and processing equipment, and all seeds, clone and biological assets, as well as the 2019 hemp crop from Butte Valley farm, from Montverde Partners, LLC (“Montverde”), in exchange for 3,000,000 shares of our common stock which were contributed by Easby Land & Cattle, LLC. Monteverde is a joint venture partner of Vaxa in the Butte Valley hemp farming operation near Walsenburg, Colorado. The transaction closed in October 2019.

Vaxa Global, LLC

Vaxa Global, LLC farms and distributes Canadian originated patented-processed hemp for biomass sale and CBD extraction within the United States to states that are approved to extract CBD. Vaxa hemp is 100% organic, non-GMO, solvent free, THC free and 100% food-grade edible. Vaxa originated from one of the first industrial hemp distributors/farmers/manufactures in Canada into the US.

Ekstrak Labs, LLC

Ekstrak Labs, LLC is an emerging company in isolate extraction. Eskstrak plans to build state-of-the-art facilities with machinery that is proven to deliver optimal extraction results. Eskstrak is developing joint venture partnerships for brand diversification into various products and creating product lines for affiliated brands through white label wholesale products.

Gramz Holdings, LLC

Gramz Holdings, LLC is a supplier of Nature’s Whole Spectrum™, natural whole plant compounds in consumer products designed to maintain the composition of the plant’s natural source and state. Gramz™ was founded to respect the potential medicinal and therapeutic value of hemp’s whole plant composition. Gramzs™ products include Gramz Whole Plant Matrix™ Sublingual Drops and Gramz Herbal Topical, with R&D in progress for additional products for both humans and pets.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Two Rivers, along withHuerfano-Cucharas Irrigation Company, TR Capital and its farming, watersubsidiaries: Two Rivers Farms, and greenhouse operations.Two Rivers Water. All significant inter-company balances and transactions have been eliminated in consolidation.

Under guidance in ASC 810-10-05-8 “Consolidation of VIEs” (Variable Interest Entities) the Company’s management has determined that GrowCo and its related entities, GCP1, GCP Super Units, GCP2, should no longer be consolidated for financial statement purposes. The Company now reports its ownership position under the equity method of accounting. Before the three months endedPrior to June 30, 2018, GrowCo and its related entities were consolidated.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. 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, 2018, as filed with the Securities and Exchange Commission on April 15, 2019.

Deconsolidation of GrowCo, Inc.

Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials, Management has determined that the Company is a guarantor of GrowCo’s $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent2018 appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000 of the notes to discuss an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100% of the recent appraised value. The Company has recorded a contingent liability of $2,359,000 and offset this amount as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).

Additionally, US GAAP (ASC 810-10-40) provides guidance on “Derecognition” of a previously consolidated entity or entities. Under this guidance, Two Rivers shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in ASC 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

a. The aggregate of all of the following:

1. The fair value of any consideration received. In Two RiversRivers’ case, no consideration was received.

2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated, or the group of assets is derecognized. In Two Rivers case, there were no retained noncontrolling investments in GrowCo or its related entities.

3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated. In Two Rivers case, the total amount of the noncontrolling interest to derecognized is as follows as of April 1, 2018:

b. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.

With the above guidance, during the year ended December 31, 2018 the Company determined that the effect of the deconsolidation of GrowCo produced a gain of $12,773,000 which is a non cash adjustment. This amount consists of elimination of the noncontrolling interest in GrowCo of $8,859,000 and $3,914,000 from the removal of GrowCo’s assets and liabilities. The $3,914,000 represented the amount of GrowCo liabilities over GrowCo’s assets.

Investment in GrowCo Partners 1, LLC (GCP1)

Due to the deconsolidation of GrowCo and its related entities, which include GCP1, the Company’s investment in GCP1 is now accounted for under the equity method.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation for the periods presented have been included as required by Regulation S-X, Rule 10-01. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on April 9, 2018.

Non-controlling Interest

Below is the detail of non-controlling interest shown on the condensed consolidated balance sheets.

In 2015, $152,000Reclassification

Certain amounts previously reported have been reclassified to conform to current presentation. Certain labels 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.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.

Since GrowCo management did not provide its financial information, for the three months ended June 30, 2018, the Company estimated its share of the GrowCo loss as accounted for under the equity method.

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.

Concentration of Credit Risk

Financial instruments that potentially subject Two Rivers to significant concentrations of credit risk include cash equivalents, marketable investments, advances and accounts receivable. The Company maintains its cash balances in the form of bank demand deposits, money market accounts that management believes to be of high credit quality. Accounts receivable are typically uncollateralized and are derived from transactions with and from customers primarily located in the United States.

Fair Value of Measurements and Disclosures

Fair Value of Assets and Liabilities Acquired

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market in an orderly transaction between market participants. In determining fair value, the accounting standards established a three-level hierarchy that distinguishes between (i) market data obtained or developed from independent sources (i.e., observable data inputs) and (ii) a reporting entity’s own data and assumptions that market participants would use in pricing an asset or liability (i.e., unobservable data inputs). Financial assets and financial liabilities measured and reported at fair value are classified in one of the following categories, in order of priority of observability and objectivity of pricing inputs:

The fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

Recurring Fair Value Measurements

The carrying value of the Company’s financial assets and financial liabilities is their cost, which may differ from fair value. The carrying value of cash held as demand deposits, money market and certificates of deposit, marketable investments, accounts receivable, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. Marketable investments are valued at Level 1 due to readily available market quotes. The fair value of the Company’s long-term debt, including the current portion approximated its carrying value. Fair value for long-term debt was estimated based on quoted market prices of the identical debt instruments or values of comparable borrowings.

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 propertypremises and equipment:

Land

Land acquired for farming or water rights 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, Managementmanagement 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.

The Company’s land located in El Paso County, Colorado, is being partially developed into 35 to 40 acre lots to be sold. For the year ended December 31, 2018 the Company recognized a gain of $238,000 from approximately $360,000 in land sales. For the nine months ended September 30, 2019, we sold two lots totaling 78 acres for a gross sales price of $116,000, recognized a gain of approximately $68,000. This transaction provided cash of approximately $47,000, paid in full the first mortgage of the El Paso land note for approximately $58,000, and direct expenses of sale of approximately $11,000. In the three months ended September 30, 2019, there were no land sales.

Water Rights and Infrastructure

ManagementSubsequent to purchase of water rights and water 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. See the discussion below concerning Impairments – Water rights and infrastructure.

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”)HCIC and Orlando Reservoir No. 2 Company, LLC (“Orlando”).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.

In conjunction with the acquisition of Vaxa, the Company recognized goodwill of approximately $14,100,000 based on the issuance of 30,000,000 shares at the closing share price ($0.44) on the date of acquisition (July 31, 2019) plus net liabilities acquired (See NOTE 8).

Revenue RecognitionImpairments

Property and Equipment

Once per year we review all property, equipment and software owned by the Company and compare the net book value of such assets with the fair market value of each piece of equipment having a net book value greater than $5,000. If it is determined that the net book value is greater than the fair market value, an impairment will be recorded. If impairment is necessary, a loss on the value of the affected asset will be recorded, and the impairment will not be reversed in future periods.

Land

Once per year we review each parcel of land owned by the Company together with improvements to each parcel and compare the carrying cost with the fair market value. If it appears that our carrying value may be greater than the fair market value, an independent appraisal will be ordered. If the appraised value is less than our carrying value, an impairment will be recorded. If impairment is necessary, a loss on the value of our land will be recorded, and the impairment will not be reversed in future periods.

Water Rights and Infrastructure

Once per year we assess the value of the water rights held by the Company, comparing our estimated values with recent sales of comparable water rights along with depreciation of the infrastructures. In the event that such assessment indicates that the carrying value is greater than the fair market value of the water rights or the depreciable replacement cost of our infrastructure, an impairment will be recorded. If impairment is necessary, a loss on value of our water rights will be recorded, and the impairment will not be reversed in future periods.

Prior to the year ended December 31, 2017, the Company recognized a $30,000 impairment on the Company’s land and water shares.

For the year ended December 31, 2017, the Company examined the depreciable replacement cost of its water infrastructure. This analysis caused the recognition of $6,900,000 impairment to the water infrastructure.

In 2018, the Company obtained two independent appraisals covering its water assets. The appraisals were in excess of the Company’s carrying value of it water rights and infrastructure.

For the year ended December 31, 2018 and the nine months ended September 30, 2019, the Company did not recognize any impairments.

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, land, licensing agreements and farming contracts by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended September 30, 2019 and 2018.

Farming

For the three and nine months ended September 30, 2019 the Company had approximately $0 in net crop share revenues. For the three and nine months ended September 30, 2018, the Company recognized approximately $0 in net crop share revenues. During 2018, the Company entered into a crop share arrangement for a percentage of a hemp crop produced on 4 acres of farm land at Butte Valley in Huerfano County, Colorado. A net payment of $18,000 for the Company’s share was received in the three months ended December 31, 2018

Vaxa generates revenue from hemp farming operations, distribution agreements and CBD consumer product sales. For the nine months ended September 30, 2019, Vaxa generated approximately $103,000 in revenue. Prior to the acquisition, Vaxa entered into a farm lease with the Company to run a pilot hemp farming operation in Butte Valley on property that the Company owned.

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 firstsecond 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 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.

Dam Demolition Expense

Dam Demolition Expense

During the three monthsyear ended September 30,December 31, 2018 a court date has been set for a hearing of the State of Colorado’s legal action to compel the Company to demolish Cucharas #5 reservoir. A contingent liability, with an offsetting expense of $1,800,000 has been recognized. In July 2019, the Company reached a settlement with the State of Colorado, whereby the Company will pay approximately $1,000,000 plus interest to the State of Colorado in exchange for a full settlement of the above legal action. The Company recognized a reduction of this contingent liability from $1,800,000 to approximately $1,000,000, along with additional non-cash gains of approximately $25,000 from the negotiations and resolution of previously recorded accounts payable, on Two Rivers’ in these financial statements. In the three months ending September 30, 2019, the Company made payments of approximately $82,000 to the State of Colorado in compliance with the payment terms of the settlement agreement. The balance of the accrued expense for the settlement was approximately $893,000 on September 30, 2019.

Debt and Equity

The Company follows beneficial conversion feature guidance in ASC 470-20, which applies to convertible stock as well as convertible debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as interest over the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the expense must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.

On May 21, 2019, the Company entered into a convertible promissory note with an investor of the Company in the amount of $262,500. The note bears 10% interest and is payable in full on May 21, 2020. The Company has recorded a beneficial conversion feature of $258,000, which is recorded as a discount on the note payable and being amortized over the life of the note. As of September 30, 2019 the balance of the beneficial conversion feature is approximately $168,000.

On May 21, 2019, the Company entered into a convertible promissory note with an investor of the Company in the amount of $262,500. The note bears 10% interest and is payable in full on May 21, 2020. The Company has recorded a beneficial conversion feature of approximately $258,000, which is recorded as a discount on the note payable and being amortized over the life of the note. As of September 30, 2019, the balance of the beneficial conversion feature is approximately $168,000.

On September 19, 2019 the Company entered into a convertible promissory note with an investor of the Company in the amount of $575,000. The note bears 12% interest and is payable in full on March 19, 2020. The note is convertible after 180 days so no beneficial conversion feature was recognized. The Company recognized a total original issue discount amount of approximately $413,000 on the note consisting of a fixed amount of $58,000 and $356,000 for shares issued. Approximately 83% of the shares issued by the Company ($297,000 of the note discount) are returnable to the Company if the note is repaid on or before the maturity date.

Preferred Dividend Payable

Preferred dividend payable represents dividends payable to holders of preferred units of TR Capital, approximately $4,937,000 as of September 30, 2019 and preferred dividends owed to holders of the Water Redevelopment Company preferred shares of approximately $51,000.

Beginning on July 1, 2018, the Company terminated the accrual of the preferred dividends payable to TR Capital preferred members due to a binding letter of intent executed with an outside strategic partner. Additionally, TR Capital has not declared dividends due the Company’s financial condition.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company has determined the deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2019, no accrued interest or penalties are included on the related tax liability line in the balance sheet.

Net Income (Loss) per Share

Basic net (loss)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 2,425,0003,058,500 options, and 17,536,95817,537,896 warrants at September 30, 2018 and December 31, 2017,2018, have an exercise price in excess of the Company’s closing price of $0.23/$0.17/share as of SeptemberDecember 28, 2018; therefore these shares have not been included in the determination of diluted earnings per share since, under ASC 260 they would be anti-dilutive. If all convertible debt is converted intoAs of September 30, 2019, the Company’stotal number of warrants outstanding were 5,948,730, including 4,225,778 issued to Black Mountain which have an exercise price of $0.07878/share.

The common shares there would be an additional 3,630,290 shares issued, usingused in the Company’s closing pricecomputation of $0.23/basic and diluted net income (loss) per share are reconciled as of September 28, 2018. Therefore, these additional shares are added to the basic shares for the nine months ended September 30, 2018.follows:

Recently Issued Accounting Pronouncements

In July 2017,March 2019 - the Financial Accounting Standards Board (“FASB”) Update 2019-01—Leases (Topic 842): Codification Improvements.The transition and effective date provisions for this Update apply to Issue 1 and Issue 2 in the Update. They do not apply to Issue 3 in the Update because the amendments for that Issue are to the original transition requirements in Topic 842. The amendments in this Update amend Topic 842. That Topic has different effective dates for public business entities and entities other than public business entities. The effective date of those amendments is for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years for any of the following:

1) A public business entity

2) A not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market

3) An employee benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC).

For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted. An entity should apply the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c). Management has determined to not adopt this application early. Further, it will have a minimal impact on the Company’s financial statements.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements of the adoption of this new accounting pronouncement.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) – “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

In July 2017, the 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 doThe Company does not believe that there will be any significant financial impact due to prior taxable losses and our net operating loss carry forward.

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

In November 2016,May 2017, the FASB issued ASU 2016-18,2017-09, “StatementCompensation-Stock Compensation (Topic 718): Scope of Cash FlowsModification Accounting””., which clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance will require thatrequires modification accounting if the statementfair value, vesting condition or the classification of cash flows explain the award is not the same immediately before and after a change duringto the period interms and conditions of 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.award. The new guidance is effective for all entities for annual periods, and interim andperiods within those annual periods, beginning after December 15, 2017, andwith 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 of this ASU to have a material impact on ourits consolidated financial statements.

In March 2016,January 2017, the FASB issued ASU 2016-09, “ImprovementsNo. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to Employee Share-Based Compensation Accounting”, which requires that excess tax benefitsassist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are recorded on the income statement as opposed to additional paid-in-capitaleffective for public business entities for annual periods beginning after December 15, 2018, 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 thatinterim periods within annual periods beginning after December 15, 2019. The amendments in this Update 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 activityapplied prospectively on or after the statementeffective date. Currently, the Company believes that this ASU has no impact on its financial statements and reporting; however, in the future it may have an impact on its financial statements with the adoption 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.this new accounting pronouncement.

In February 2016, the FASB issued ASU 2016-02, ““Leases” Topic 842, which amends the guidance in former ASC Topic 840,Leases”. The new standard establishes aincreases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (ROU) model that requires a lessee to record a ROU asset(“ROU”) assets and a lease liabilityliabilities on the balance sheet for all leases with terms longer than 12 months. LeasesUnder the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new standardlease guidance effective January 1, 2019. The Company only has one lease in effect; its office lease located in Aurora Colorado. The lease rate is effective for fiscal years beginning after December 15, 2018 which includes interim periods within those fiscal years. A modified retrospective transition approachless than $3,000/month and expires on March 31, 2020. The Company is required for lessees for capitalmore likely than not to renew this lease and operating leases existing at, or entered into after,is not obligated to renew the beginninglease. The office lease is insignificant to the financial presentation of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this ASUCompany; therefore, it is expected to result in all operating leases being capitalized innot shown on the Company’s financial statements. Due toThe Company has adopted the GrowCo leases, management believesmodified retrospective approach therefore the Company has no plans of restating prior periods and that this ASU will have an impact on its financials andthere is in the process of analyzing its impact.no asset or liability currently.

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

NOTE 3 – INVESTMENTS AND LONG-LIVED ASSETS

Land

Upon purchasing land, the value is recorded at the purchase price or fair value, whichever is more appropriate. Costs incurred to prepare the land for the intended purpose are also capitalized in the recorded cost of the land. No amortization or depreciation is taken on land. However, the land is reviewed by management at least once per year to ascertain if a further analysis is necessary for any potential impairments.

Water Rights and Infrastructure

The Company has acquired both direct flow water rights and water storage rights. It has obtained water rights through the purchase of shares in a mutual ditch company, which it accomplished through its purchase of shares in HCIC, or through the purchase of an entity holding water rights, which it effected through its purchase of a membership interest of Orlando. The Company may also acquire water rights through outright purchase. In all cases, such rights are recognized under decrees of the Colorado water court and administered under the jurisdiction of the Office of the State Engineer.

Upon purchasing water rights, the value is recorded at our 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 $6,930,000 ofno impairments on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.

Gain on Disposal of Assets

During the nine months ended September 30, 2019 and 2018, we sold sub-divided, unimproved lots of land located in El Paso County Colorado and recognized a gain of $156,000. Duringapproximately $68,000 and $80,000, respectively. For the nine months ended September 30, 2018 there was also a $42,000 loss2019, we recognized approximately $85,000 gain from the sale and disposal of equipment.

NOTE 4 – NOTES PAYABLE

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

Notes:

(1) Prime rate + 1%, but not less than 6%

(2) Prime rate + 1.5%, but not less than 6%

The Company elected to adopt early FASB ASU 2016-03, whereby debt issuance costs are recorded as a deduction from the carrying value of liability, and not recorded as an asset. The debt issuance costs are amortized using the effective interest method which, in this situation, equals a straight line method.

HCIC Carry Back LoanNOTE 5 – SHORT-TERM CONVERTIBLE NOTE PAYABLE

PaymentsOn September 24, 2019, we entered into an agreement (“Agreement”) with an accredited investor (“Note Holder”) to allprovide a net of $457,500 in short term working capital. Two Rivers intends to use these funds for the payment of certain debts, payments on accounts and working capital.

The face value of the HCICconvertible debt is $575,000 with a purchase price of $517,500, a 6-month term and an interest rate of 10% per annum. The debt is convertible at a per common stock price at the lower of 70% multiplied by the 10-day trailing market price of Two Rivers’ common shares (representing a discount rate of 30%) or $0.30/share. The Convertible note holders are behind schedule. Asis subject to other terms and conditions.

Two Rivers issued 1,101,532 shares of its common stock (the “Returnable Shares”) to the Note Holder, as well as an additional 220,306 shares of Common Stock (the “Commitment Shares”), subject to the terms and conditions of the Agreement and the Note, pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933. If Two Rivers pays the convertible debt prior to 180 days from the date of the convertible note, the Returnable Shares shall be returned by the Note Holder to Two Rivers. If Two Rivers fails to pay the convertible note by that date, the Note Holder may retain the Returnable Shares.

In August 2019, Investors Fiduciary, LLC loaned $75,000 to the Company under the existing credit line to bring the balance to approximately $786,000 as of September 30, 2018,2019. The credit line contains a conversion feature at a rate of $0.14 per share. Investors Fiduciary is controlled by Greg Harrington, CEO of the Company and Gerald Anderton, Sr., Chairman of the Board of the Company is an investor.

On May 24, 2019, we entered into separate securities purchase agreements with two investors pursuant to which we received $480,000 in technical default on $6,301,000cash, which we intend to use for the payment of outstanding indebtedness and accounts payable and for working capital. Pursuant to the HCIC carry backsecurities purchase agreements, we issued convertible promissory notes, due to non-paymenthaving a total principal amount of principal and interest. Consequently, the entire amount$525,000. Each of the notes has been classified as current.

GrowCo $4M Notes Guaranty

Duringa one-year term and bears interest at the period ended December 31, 2015, GrowCo issued $4,000,000 in secured promissory notes to 17 individual investors. The notes have a security interest in the land, water and improvements on the 40 acres where GrowCo Partners 1 has its greenhouse and associated warehouse. The notes pay 22.5% in annual interest, with interested paid monthly, and are due April 1, 2020. GrowCo cannot prepay the notes; however, noteholders have the right to callrate of 10% per annum. We sold the notes at the first anniversary, or thereafter,for an aggregate purchase price of each note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes are in technical default.

On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo claiming a default on payments by GrowCo to Blue Green under the terms of the $4 million GrowCo $2,115,000 promissory note held by Blue Green. The complaint requested immediate$525,000, less $45,000 for payment of the note, back due interest in excess of $300,000,for legal fees and attorney fees.

Even though the Company no longer consolidates GrowCo and GrowCo’s related entities into the Company’s financials (see above Note 2 – Principals of Consolidation), under ASC 460-10-05, Management has determined that the Company is a guarantor of the $4M Secured Notes. The Company did not sign these notes as a guarantor but has provided collateral owned by the Company with a recent appraised value of $2,359,000. GCP1 managers have been in contact with Blue Green, the holder of $2,115,000original issue discount. Each of the notes is convertible into common stock at a price equal to discuss an arrangement whereby GCP1 might use leasing cash flow to pay the secured note holders. No agreement has been reached, but there have been discussions on a general structure that 50% of lease revenue (after direct costs) might be used to pay interest and retire the principal of these notes. Since Two Rivers’ Management desires to present a conservative representation of its financial information it has determined to set the probability of collection against its collateral at 100%60% of the recent appraised value.trailing market price of common stock (representing a discount of 40%). The Company has recorded a contingent liability of $2,359,000minimum conversion price for each note is $0.20 per share unless and offset this amountuntil such time, if any, as an increase in the Company’s investment in GCP1 (ASC 460-10-55-23c).

Powderhorn Note

The Company has decided to pay Powderhorn’s August and September 2018 payments by issuance of 800,000 and 646,154 shares andwe do not in cash. Subsequent to September 30, 2018, 800,000 shares have been issued and the 646,154 shares have yet to be issued.

OID Black Mountain

During the nine months ended September 30, 2018, the Company issued 874,250 common shares formake a principal reduction of $100,000. It was originallyand interest payment when due on October 26, 2017 but was extendedwith respect to July 31, 2018. It has been further extended to September 30, 2018. In October 2018, the Company reached an agreement with Black Mountain to fully pay Black Mountain amount due of $138,370 with the issuance of 900,000 common shares of the Company’s stock.note.

Investors Fiduciary LLC

On July 23, 2018 the Company entered into a convertible promissory note with Investors Fiduciary LLC for a bridge loan up to $500,000. As of September 30, 2018, $400,000 has been drawn on this note. The note carries interest at 20% per annum and is secured by the Company’s unencumbered 2,456.5 shares in the Huerfano Cucharas Irrigation Company. The holder has a right to convert principal and any accrued interest into the Company’s common shares at a rate of $0.14/share. On July 23, 2018, the Company’s common stock closed at $0.117/share. Therefore, the Company did not record a beneficial conversion feature.

NOTE 56 –Information on Business SegmentsINFORMATION ON BUSINESS SEGMENTS

We organize our business segments based on the nature of the products and services offered. WeCurrently, we focus on the WaterFarms and GreenhouseWater business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of businesses: GreenhouseFarms 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. TheIn 2017, the prior farming operations were discontinued; however, we continue to report with a Farming Business has been discontinued and therefore the operating losses and assets have been summarized. Effective April 1, 2018 and for the nine months ended September 30, 2018, the Company stopped consolidating GrowCo, the Greenhouse segment.since we are expanding our farming business in 2019.

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):