TWO RIVERS WATER & FARMING (TURV) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

000-51139

(Commission file number)

Two Rivers Water & Farming Company

(Exact name of registrant as specified in its charter)

Colorado	13-4228144
(State of Incorporation)	(I.R.S. Employer Identification No.)

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)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
	Emerging growth company [X]

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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:87,145,235 shares as of November 22, 2019.

TABLE OF CONTENTS

ITEM	DESCRIPTION	PAGE
PART 1 - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION	26
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 4.	CONTROLS AND PROCEDURES	31
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	33
ITEM 1A.	RISK FACTORS	33
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4.	MINE SAFETY DISCLOSURES	34
ITEM 5.	OTHER INFORMATION	34
ITEM 6.	EXHIBITS	35

2

PART 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)

	September 30, 2019			December 31, 2018
	(Unaudited)			(Derived from Audit)
ASSETS:
Current Assets:
Cash and cash equivalents	$	401		$	6
Accounts receivable, related party		17			0
Deposits and other current assets		63			58
Total Current Assets		481			64
Long Term Assets
Property, equipment and software, net		5			20
Land		3,252			3,299
Water assets		24,891			24,891
Supply rights		480			-
Investment in GCP1		2,192			2,289
Goodwill		14,100			-
Other long term assets		98			96
Total Long Term Assets		45,018			30,595
TOTAL ASSETS:	$	45,499		$	30,695
LIABILITIES & STOCKHOLDERS’ EQUITY:
Current Liabilities:
Accounts payable	$	1,305		$	1,243
Accrued liabilities		5,963			5,780
Current portion of notes payable, net of discount		9,329			8,099
Preferred dividend payable		4,988			4,970
Total Current Liabilities		21,585			20,092
Notes payable, net of current portion		868			1,173
Total Liabilities		22,453			21,265
Commitments & Contingencies (Notes 4,7,9,10)
Stockholders’ Equity:
Common stock, $0.001 par value, 200,000,000 shares authorized, 83,195,939 shares issued and outstanding at September 30, 2019 and 45,574,458 shares issued and outstanding at December 31, 2018		84			46
Preferred shares, $0.001 par value, 5,000,000 shares authorized, 64,935 shares issued and outstanding at September 30, 2019 and December 31, 2018.		252			252
Additional paid-in capital		95,942			81,186
Accumulated (deficit)		(95,596	)		(94,454	)
Total Two Rivers Water & Farming Company Stockholders’ Equity		682			(12,970	)
Noncontrolling interest in subsidiaries		22,364			22,364
Total Stockholders’ Equity		23,046			9,394
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	45,499		$	30,659

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

3

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except for number of shares)

(Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Revenue:
Sales	$	3		$	-		$	3		$	-
Distribution Rights		100			-			100			-
Land leasing		-			-			34			-
Other		5			5			8			-
Total Revenue		108			5			145			22
Direct cost of revenue		-			-			-			-
Gross Margin		108			5			145			22
Operating Expenses
General and administrative		312			661			1,149			1,838
Dam demolition expense		(825	)		1,800			(825	)		1,800
Depreciation and amortization		16			17			48			75
Total operating expenses		(497	)		2,478			372			3,713
Profit (Loss) from Operations		605			(2,473	)		(227	)		(3,691	)
Other Income (Expense)
Interest expense		(390	)		(217	)		(918	)		(736	)
Gain (loss) on disposal of assets and intangibles		-			37			85			114
Loss on debt settlement		-			-			33			-
Other income		1			4			1			15
Gain on de-consolidation of GrowCo		-			-			-			12,773
Loss on investment in GrowCo Partners 1, LLC		(26	)		-			(98	)		(617	)
Total other income (expense)		(415	)		(176	)		(897	)		11,549
Net Profit (Loss) from Continuing Operations Before Taxes		190			(2,649	)		(1,124	)		7,858
Income tax (provision) benefit		-			-			-			-
Net Profit (Loss) from Continuing Operations After Taxes		190			(2,649	)		(1,124	)		7,858
Net (Loss) from Deconsolidation and Discontinued Operations		-			-			-			(810	)
Net Profit (Loss) before Preferred Dividends and Non-Controlling Interest		190			(2,649	)		(1,124	)		7,048
Preferred distributions		(6	)		(6	)		(18	)		(1,002	)
Net loss attributable to non-controlling interest		-			-			-			-
Net Profit (Loss) Attributable to Common Shareholders		184			(2,655	)		(1,142	)		6,046
Profit (Loss) Per Common Share - Basic:		0.00			(0.08	)		(0.02	)		0.18
Profit (Loss) Per Common Share – Basic and Dilutive:		0.00			(0.08	)		(0.02	)		0.16
Weighted Average Shares Outstanding:
Basic		71,006			34,256			57,057			33,529
Dilutive		85,867			34,256			57,057			37,149

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

4

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	2019			2018
Cash Flows from Operating Activities:
Net loss, before NCI	$	(1,142	)	$	6,046
Net loss from discontinued operations		-			810
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		48			75
Accretion of debt discount		313			178
Loss (Gain) from debt extinguishment		(33	)		-
Loss of modification of convertible debt		(8	)		-
Stock issued for services		144			-
Stock option and warrant exercise		290			1,220
Gain on deconsolidation		-			(12,773	)
Loss of investment in GrowCo		98			617
Loss (Gain) from disposal of fixed assets		(85	)		(114	)
Net change in operating assets and liabilities
Decrease (Increase) in accounts receivable, related party		(4	)		2
Decrease in deposits, prepaid expenses and other assets		(2	)		(47	)
Increase (decrease) in accounts payable		77			93
Increase in distribution payable to preferred shareholders		18			1,002
Increase in accrued liabilities and other		(503	)		2,067
Net Cash Used in Operating Activities		(789	)		(824	)
Cash Flows from Investing Activities:
Purchase of property and equipment		(33	)		-
Sale of property and equipment		47			72
Investment in water assets		-			(102	)
Acquisition		9			-
Net Cash Used in Investing Activities		23			(30	)
Cash Flows from Financing Activities:
Borrowings on debt – related party		20			-
Proceeds from debt		1,235			1,426
Payment on notes payable		(94	)		(532	)
Net Cash Provided by Financing Activities		1,161			894
Net Increase in Cash & Cash Equivalents		395			40
Beginning Cash & Cash Equivalents		6			14
Ending Cash & Cash Equivalents		401			54
Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	-		$	196
Shares issued in exchange for debt	$	357		$	-
Conversion of debt, preferred shares into Two Rivers common stock	$	287		$	100
Land exchanged for debt	$	58		$	-
Equipment exchanged for debt	$	14		$	-
Debt discount from beneficial conversion feature	$	516		$	-
Cashless exercise of warrants	$	1		$	1

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

5

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)

(Unaudited)

	Voting Common Stock				Water Redev. Preferred				Additional Paid-in			Accumulated			Non-Controlling			Stockholders’
	Shares		Amount		Shares		Amount		Capital			(Deficit)			Interest			Equity
Balances December 31, 2017		32,750	$	34		65	$	252	$	77,267		$	(97,168	)	$	31,752		$	12,137
Net Income attributed to Two Rivers common shareholders		-		-		-		-		-			6,046			-			6,046
Prior period adjustment preferred shares		-		-		-		-		(100	)		-			-			(100	)
Stock issued in exchange for debt settlement		874		2		-		-		98			-			-			100
Shares issued for TR Capital conversions		15		-		-		-		-			-			-			-
Stock-based compensation		-		-		-		-		1,190			-			-			1,190
Shares issued for services		1,091		0		-		-		(1	)		-			-			(1	)
RSU issuance		118		0		-		-		(0	)		-			-			-
Warrant issuance		-		-		-		-		30			-			-			30
Non-controlling interest		-		-		-		-		-			-			(383	)		(383	)
GrowCo deconsolidation		-		-		-		-		-			-			(8,858	)		(8,858	)
Balances, September 30, 2018		34,848	$	36		65	$	252	$	78,484		$	(91,122	)	$	22,511		$	10,161
Balances December 31, 2018		45,575	$	46		65	$	252	$	81,186		$	(94,454	)	$	22,364		$	9,394
Net Income attributed to Two Rivers common shareholders		-		-		-		-		-			(1,142	)		-			(1,142	)
Stock issued in exchange for debt settlement		4,220		4		-		-		283			-			-			287
Beneficial conversion feature on convertible debt		-		-		-		-		516			-			-			516
Stock-based compensation		-		-		-		-		230			-			-			230
Shares issued for services		755		1		-		-		143			-			-			144
Warrant exercise		1,324		2		-		-		(2	)		-			-			-
Warrant issuance		-		-		-		-		60			-			-			60
Refundable shares issued for debt		1,322		1		-		-		356			-			-			357
Shares issued for acquisition		30,000		30		-		-		13,170			-			-			13,200
Balances September 30, 2019		83,196	$	84		65	$	252	$	95,942		$	(95,596	)	$	22,364		$	23,046

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

6

NOTE 1 – ORGANIZATION AND BUSINESS

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

Prior 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, 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 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 such other subsidiaries transferred to TR Capital. As a result of those transactions, TR Capital owns all of the operations formerly conducted by those subsidiaries.

Overview

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

We are focused on water assets we have acquired and will acquire in the future. Since 2009, we have acquired strategic water assets and land in the Huerfano and Cucharas river basins in southeastern Colorado, thus the name Two Rivers. Our water asset area spans over 1,900 square miles and drops in elevation from over 14,000 feet down to the confluence of the Arkansas River, just east of Pueblo Colorado at 4,500 feet. We operate in a natural, gravity fed water alluvial. This basin is the last undeveloped basin along the front range of Colorado. We plan to 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 through asset sales and reinvestment. We plan 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 plan 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 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 would 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 was no longer required under US GAAP.

7

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 facilitate raising additional capital to 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 Redevelopment’s primary 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:

● The quotient of 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa for the twelve months ending June 30, 2020, divided by $1.00; and

● 20,000,000.

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.

8

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Two Rivers, Huerfano-Cucharas Irrigation Company, TR Capital and its subsidiaries: Two Rivers Farms, and 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. Prior 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 2018 appraised value of $2,359,000. 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 Rivers’ 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.

9

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:

Entity	April 1, 2018
GrowCo		(1,230,000	)
GrowCo Partners 1, LLC		3,621,000
GCP Super Units, LLC		5,016,000
TR Cap 20150630 Distribution, LLC		497,000
TR Cap 20150930 Distribution, LLC		460,000
TR Cap 20151231 Distribution, LLC		495,000
Total	$	8,859,000

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.

Non-controlling Interest

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

Entity	September 30, 2019		Dec 31, 2018
TR Capital	$	20,342,000	$	20,342,000
HCIC		1,379,000		1,379,000
F-1		29,000		29,000
F-2		162,000		162,000
DFP		452,000		452,000
Total	$	22,364,000	$	22,364,000

Reclassification

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

Use of Estimates

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

10

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:

● Level 1 – Fair value based on quoted prices in active markets for identical assets or liabilities.

● Level 2 – Fair value based on significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.

● Level 3 – Fair value based on prices or valuation techniques that require significant unobservable data inputs. Inputs would normally be a reporting entity’s own data and judgments about assumptions that market participants would use in pricing the asset or liability.

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.

11

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset, which ranges from three to twenty-seven and a half years. Maintenance and repairs are charged to expense as incurred; improvements and betterments are capitalized. Upon retirement or disposition, the related costs and accumulated depreciation are removed from the accounts, and any resulting gains or losses are credited or charged to income.

Below is a summary of premises and equipment:

Asset Type	Life in Years	September 30, 2019			December 31, 2018
Office equipment, furniture	5 – 7	$	12,000		$	12,000
Computers	3		46,000			46,000
Vehicles	5		9,000			25,000
Farm equipment	7 – 10		147,000			147,000
Buildings	27.5		10,000			10,000
Website	3		7,000			7,000
Subtotal			231,000			247,000
Less: Accumulated depreciation			(226,000	)		(227,000	)
Net book value		$	5,000		$	20,000

Land

Land acquired for farming is recorded at cost. Some of the land acquired has not been farmed for many years, if not decades. Therefore, additional expenditures are required to make the land ready for efficient farming. Expenditures for leveling the land are added to the cost of the land. Irrigation is not capitalized in the cost of Land (Property and Equipment above). Land is not depreciated. However, once per year, management will assess the value of land held, and in their opinion, if the land has become impaired, Management will establish an allowance against the land.

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

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. 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 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.

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).

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Impairments

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.

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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 second 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.

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

During the year ended 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.

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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.

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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 (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 3,058,500 options, and 17,537,896 warrants at December 31, 2018, have an exercise price in excess of the Company’s closing price of $0.17/share as of December 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. As of September 30, 2019, the total 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 used in the computation of basic and diluted net income (loss) per share are reconciled as follows:

	Nine Months Ended September 30,
	2019		2018
Weighted average number of shares outstanding – basic		71,006,000		57,057,000
Dilutive effect of convertible debt		8,912,000		-
Dilutive effect of warrant exercise		5,949,000		-
Weighted average number of shares outstanding – diluted		85,867,000		57,057,000

Recently Issued Accounting Pronouncements

In 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.

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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. The 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 May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification 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 requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 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 assist 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 effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective 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 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 increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under 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 finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company adopted the new lease guidance effective January 1, 2019. The Company only has one lease in effect; its office lease located in Aurora Colorado. The lease rate is less than $3,000/month and expires on March 31, 2020. The Company is more likely than not to renew this lease and is not obligated to renew the lease. The office lease is insignificant to the financial presentation of the Company; therefore, it is not shown on the Company’s financial statements. The Company has adopted the modified retrospective approach therefore the Company has no plans of restating prior periods and that there is no asset or liability currently.

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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 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 no 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 approximately $68,000 and $80,000, respectively. For the nine months ended September 30, 2019, we recognized approximately $85,000 gain from sale and disposal of equipment.

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NOTE 4 – NOTES PAYABLE

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

	September 30, 2019								December 31, 2018
Note	Principal Balance			Accrued Interest		Discount			Principal Balance			Interest rate			Security
HCIC seller carry back	$	6,323,000		$	1,050,000	$	-		$	6,323,000			6	%	Shares in the Mutual Ditch Company
CWCB		622,000			11,000		-			690,000			2.5	%	Certain Orlando and Farmland assets
GrowCo note		390,000			29,000		-			390,000			6	%	None
Bridge loan Harding		7,000			1,000		-			15,000			12	%	Added to lien on Ellicott land
El Paso Land notes		271,000			76,000		-			271,000			12	%	Second lien on Ellicott land
Easby Credit Line (Vaxa), related party		486,000			8,000		-			-			-		Unsecured
Promissory Note (Vaxa)		250,000			-		-			-			-		Biomass material
Investors Fiduciary, related party		786,000			133,000		-			551,000			20	%	Shares of HCIC
Auctus Convertible Note		262,500			9,000		168,000			-			10	%	Unsecured
Morningview Convertible Note		262,500			9,000		168,000			-			10	%	Unsecured
Labry’s Convertible Note		575,000			2,000		388,000			-			12	%	Unsecured
WRC convertible notes		300,000			101,000		-			500,000			12	%	Lien on water supply agreement
Butte Valley Land notes		400,000			101,000		-			200,000			18	%	Butte Valley Land
McFinney Agri-Finance		-			-		-			60,000			6.8	%	2,400 acres of land in Ellicott Colorado
Powderhorn/Silverback note		-			-		-			203,000			12	%	Third lien on Ellicott land
Equipment loans		-			-		-			57,000			5-8	%	Equipment
Morningview Financial note		-			-		-			75,000			18	%	Unsecured
Total		10,935,000		$	1,530,000	$	(724,000	)		9,335,000
Less: note discounts		(724,000	)							(63,000	)
Less: Current portion net of discount		(9,343,000	)							(8,045,000	)
Long term portion	$	868,000							$	1,227,000

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NOTE 5 – SHORT-TERM CONVERTIBLE NOTE PAYABLE

On September 24, 2019, we entered into an agreement (“Agreement”) with an accredited investor (“Note Holder”) to provide 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 convertible 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 is 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, 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 cash, which we intend to use for the payment of outstanding indebtedness and accounts payable and for working capital. Pursuant to the securities purchase agreements, we issued convertible promissory notes, having a total principal amount of $525,000. Each of the notes has a one-year term and bears interest at the rate of 10% per annum. We sold the notes for an aggregate purchase price of $525,000, less $45,000 for payment for legal fees and original issue discount. Each of the notes is convertible into common stock at a price equal to 60% of the trailing market price of common stock (representing a discount of 40%). The minimum conversion price for each note is $0.20 per share unless and until such time, if any, as we do not make a principal and interest payment when due with respect to the note.

NOTE 6 –INFORMATION ON BUSINESS SEGMENTS

We organize our business segments based on the nature of the products and services offered. Currently, we focus on the Farms and Water business with Two Rivers Water & Farming Company as the Parent company. Therefore, we report our segments by these lines of businesses: Farms and Water. 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 2017, the prior farming operations were discontinued; however, we continue to report with a Farming Business 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.

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Operating results for each of the segments of the Company are as follows (in thousands):

	Nine Months Ended September 30, 2019												Nine Months Ended September 30, 2018
	Parent			Vaxa			Water			Total			Parent			Greenhouse			Water			Total
Revenue	$	34		$	103		$	8		$	145		$	10		$	-		$	12		$	22
Less: Direct Cost of Revenue		-			-			-			-			-			-			-			-
Gross Margin		34			103			8			145			10			-			12			22
Expenses
Total Operating Expenses		(611	)		(14	)		253			(372	)		(886	)		-			(997	)		(1,883	)
Total Other Income (Expense)		(484	)		7			(420	)		(897	)		11,928			-			(2,209	)		9,719
Net Income (Loss) from Operations Before Income Taxes		(1,061	)		96			(159	)		(1,124	)		11,052			-			(3,194	)		7,858
Income Taxes (Expense) Credit		-			-			-			-			-			-			-			-
Net Income (Loss) from Operations		(1,061	)		96			(159	)		(1,124	)		11,052			-			(3,194	)		7,858
Net Income (Loss) from Discontinued Operations		-			-			-			-			-			(810	)		-			(810	)
Preferred dividends		-			-			(18	)		(18	)		(986	)		-			(16	)		(1,002	)
Non-controlling interest		-			-			-			-			-			-			-			-
Net Income (Loss)	$	(1,061	)	$	96		$	(177	)	$	(1,142	)	$	10,066		$	-		$	(3,210	)	$	6,046
Segmented Assets	$	24,856		$	24,856		$	20,131		$	45,500		$	10,746		$	-		$	20,175		$	30,921

NOTE 7 – EQUITY TRANSACTIONS

The Company has authorized 200,000,000 shares of common stock with a par value of $0.001. The total issued common stock as of September 30, 2019, was 83,195,969 common shares.

During the nine months ended September 30, 2019, Two Rivers issued the following common stock:

● 1,179,817 shares issued to Morningview as a $75,000 principal paydown plus interest, which represents the debt being fully paid at June 30, 2019 and which did not produce a loss because the conversion was made under the terms of the convertible debt agreement;

● 3,040,350 shares issued to Powderhorn/Silverback as a $127,665 principal paydown plus interest, which represents the debt being fully paid at June 30, 2019 and which did not produce a loss because the conversion was made under the terms of the convertible debt agreement;

● 555,560 shares issued to an investor relations firm. The shares issued were valued at $0.1283/share with a corresponding expense of approximately $71,000;

● 545,455 shares issued to Silverback for a cashless exercise of warrants;

● 255,231 shares issued to Black Mountain for a cashless exercise of warrants;

● 14,840 shares issued for a conversion from TR Capital;

● 523,395 shares issued to Black Mountain for a cashless exercise of warrants;

● 30,000,000 shares issued to Easby Land & Cattle Company, LLC. The shares were valued at $0.44/share or approximately $13,200,000;

● 185,000 shares issued to a chief financial officer firm. The shares issued were valued at $0.27/share with a corresponding expense of approximately $50,000;

● 139,985 shares issued for a conversion from TR Capital; and

● 1,321,838 shares issued to Labrys Fund, LP (see Note 5).

During the nine months ended September 30, 2018, Two Rivers issued 374,250 common stock to Black Mountain for a $100,000 principal reduction in its Note Payable.

During the nine months ended September 30, 2019, Two Rivers recognized $289,000 in stock based compensation to its employees and directors.

During the nine months ended September 30, 2018, Two Rivers recognized $373,000 in stock based compensation to its employees and directors.

During the nine months ended September 30, 2019, the Company recorded a total of $516,000 in beneficial conversion features related to Convertible Promissory Notes.

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.

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NOTE 8 – ACQUISITION OF VAXA GLOBAL

On July 31, 2019, the Company closed on the purchase of all the membership interests in Vaxa Global, LLC (“Vaxa”) and its two wholly-owned subsidiaries from the sole member Easby Land & Cattle, LLC (“Easby”). Greg Harrington, the managing member of Easby became the CEO of the Company and a member of the Board of Directors in September 2019. Vaxa is in the business of hemp farming, extraction and manufactured consumer CBD products. The closing occurred pursuant to a Share Exchange Agreement between the Company and Easby on February 22, 2019, as amended.

Pursuant to the Share Exchange Agreement, the Company issued a total of 30,000,000 shares of common stock to Easby at the closing for the Vaxa membership interests. There was no cash consideration paid for the acquisition. The Purchase Price for the acquisition, $13,200,000 was calculated using the closing price Two Rivers common stock on the date of closing, $0.44/share, multiplied by 30,000,000 shares.

In addition to the shares issued at closing, the Company may be required to issue additional shares of common stock pursuant to an earn-out covenant in the share exchange agreement. The number of earn-out shares will equal the lesser of:

i.)	the quotient of 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa for the twelve months ending June 30, 2020, divided by $1.00; and
ii.)	20,000,000.

It is expected that the earn-out shares, if any, would be issued by August 2020. There was no valuation applied to the earnout on the acquisition date due to the historical performance of Vaxa and the Company’s expectation of the likelihood of material earnings during the window. The earnout valuation will be reviewed quarterly until its expiration in June 2020.

The acquisition date estimated fair value of the consideration transferred totaled $13,200,000, which consisted of the following:

Cash paid	$	0
Common Stock Issued		13,200,000
Total Purchase Price	$	13,200,000
Net Assets Acquired	$	511,000
Net Liabilities & Retained Earnings		(1,411,000	)
Goodwill		14,100,000
Total Purchase Price	$	13,200,000

The primary asset of Vaxa at the time of acquisition was an exclusive distribution agreement with a Canadian grower and supplier of cannabidiol-rich hemp biomass. The agreement was from its inception in December 2017 runs for a five-year term. The agreement calls for fixed payments of $700,000 for the exclusive supply rights at competitive fixed prices. Vaxa had recognized the value of the agreement as intangible asset and is amortizing the value over the 5 year period. The balance, net of amortization, on the time of acquisition was approximately $480,000.

During the preliminary purchase price allocation period, which may be up to one year from the business combination date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary purchase price allocation period, the Company may record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in its operating results in the period in which the adjustments were determined.

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Pro forma results

The following table sets forth the audited pro forma results of the Company as if the acquisition was effective on the first day of each period presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.

	Six Months			Twelve Months
	Ending			Ending
	Jun 30, 2019			Dec 31, 2018
	(unaudited)			(unaudited)
Revenue	$	70,000		$	66,000
Net Income (Loss)	$	(1,608,000	)	$	1,820,000
Basic Net Income (Loss) per share	$	(0.02	)	$	0.03
Diluted Net Income (Loss) per share	$	(0.02	)	$	0.03
Weighted average shares – basic		79,967			65,139
Weighted average shares – diluted		79,967			67,408

NOTE 9 – GOING CONCERN

The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not generated significant revenues and has a net loss of $1,142,000 during the nine months ended September 30, 2019. Cash consumed from our operations during the nine months ended September 30, 2019 was $789,000. At September 30, 2019, the Company had a working capital deficit of $21,104,000 and an accumulated deficit of approximately $95,596,000. The HCIC seller carry back debt are in technical default.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management’s plans to mitigate.

We are in the process of working with the Vaxa Entities and its funders to continue to fund Two Rivers operations. There is no assurances that this additional funding will occur.

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

Management Plans

We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results. We believe the actions will satisfy our estimated liquidity needs 12 months from the issuance of these financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

GrowCo $4M Notes Guaranty

During 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 interest paid monthly, and are due April 1, 2020. GrowCo cannot prepay the notes; however, noteholders have the right to call the notes at the first anniversary, or thereafter, of each note with a 60-day notice to the Company. Due to the past due interest owed to the secured $4M Note holders, these notes are in technical default.

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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 payment of the note, back due interest in excess of $300,000, 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. 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).

Operating Leases

In January 2016, the Company entered into a new lease with the Colorado Center in Denver Colorado for the corporate headquarters. The space is 1,775 square feet and monthly payments of $3,900, with minor escalations and common area maintenance charges. The lease terminated on June 30, 2018. On March 1, 2017, the Company entered into a sub-lease agreement with its related party McGrow for its office facilities. McGrow did not fulfill its sub-lease agreement. In 2018, Two Rivers paid Colorado Center $24,000 as a penalty for early lease termination.

In February 2017, we entered into a new lease with Parker Road Campus, LLC in Aurora, Colorado, for our corporate headquarters. This space is 1,554 square feet and monthly payments of $2,201 which began on April 1, 2017. The lease terminates on March 31, 2020. The amounts due at the base rate are as follows:

Period	Amount Due
July 1 – December 31, 2019	$	16,000
2020	$	7,000
2021		-

Defined Contribution Plan

Two Rivers does not have a defined contribution plan.

Employment Agreements

Since January 1, 2011, the Company has entered into a series of employment agreements with Wayne Harding in various capacities including Chief Financial Officer initially and later as Chief Executive Officer and Chairman. The initial term of the contract was one year, which renews automatically for successive one-year terms unless and until either party delivers notice of termination within 30 days of the expiration of the then current term. The original employment agreement was modified in 2017. On September 10, 2019, Harding resigned his positions as Chief Executive Officer and Member of the Board of Directors effective September 30, 2019. On September 10, 2019, Harding and the Company entered into a Management Services Agreement effective October 1, 2019 with a four month renewable term.

The Board determines annual incentive compensation at the Board’s sole discretion. If there is a change of control, Mr. Harding is entitled to an accelerated option vesting.

Prior Board of Directors Litigation

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

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DFP Litigation

On October 18, 2017, at the Company filed a lawsuit against former employees of the its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims. The counter claim on the lawsuit was settled in November 2019 and the Company will pursue an insurance claim for the theft losses.

NOTE 11 – RELATED PARTY

During the nine months ended September 30, 2019 Mr. Harding loaned the Company an additional $2,500. During the same period, the Company made repayments of approximately $11,000 leaving an outstanding balance of approximately $7,000 at September 30, 2019.

In August 2019, the Company received $75,000 in Bridge loans from Gerald Anderton which were added to the balance of the Credit Agreement with Investors Fiduciary, LLC. Mr. Anderton is an investor in Investors Fiduciary and currently serves on Two Rivers’ Board and as Chairman of the Board. Greg Harrington, Chief Executive Officer of the Company is the controlling shareholder of Investors Fiduciary.

NOTE 12 – SUBSEQUENT EVENTS

Pursuant to ASC 855, management has evaluated all events and transactions that occurred fromSeptember 30, 2019through the date of issuance of these financial statements. During this period, we had the following significant subsequent events:

●	On November 7, 2019, Two Rivers entered into an agreement (“Agreement”) with the Note Holder, an accredited investor, to provide a net of $315,000 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 convertible debt is $394,500 with a purchase price of $354,600, a 6-month term and an interest rate of 12% per annum. The debt is convertible at a price equal to the lower of (1) 70% multiplied by the lowest closing bid price or trading price (whichever is lower) of Two Rivers’ common shares during the 10 trading days immediately preceding the conversion date (representing a discount rate of 30%) and (2) $0.30 per share. The convertible note is subject to other terms and conditions.
	Two Rivers issued 1,083,791 shares of its common stock (the “Returnable Shares”) to the Note Holder, as well as an additional 200,000 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.
●	On October 18, 2019, Black Mountain completed the cashless exercise of 2,665,505 shares of Common Stock.
●	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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION

Unless the context requires otherwise, references in this Form 10-Q to “we,” “our,” “us” and similar terms refer to Two Rivers Water & Farming Company and its subsidiaries.

Note about Forward-Looking Statements

This Form 10-Q contains forward-looking statements, such as statements relating to our financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including the risks described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018. By making these forward-looking statements, we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the Securities and Exchange Commission under the Federal securities laws. Our actual results may differ materially from our forward-looking statements.

Overview

Our core business is the development of our water assets.

Current Rights Holdings

In Colorado it is important to have both surface and storage rights, of which we have both. To date, we have acquired, managed and used our water assets principally for use in irrigation, to increase the value and yield of our farmland.

We own the following surface water rights:

Structure	Elevation	Priority No.	Appropriation Date	Consumptive Use	Decreed Amount
Butte Valley Ditch	5,909 ft	1	5/15/1862	360 A.F.	1.2 cfs
Butte Valley Ditch		9	5/15/1865		1.8 cfs
Butte Valley Ditch		86	5/15/1886		3.0 cfs
Butte Valley Ditch		111	5/15/1886		3.0 cfs
Robert Rice Ditch	5,725 ft	19	3/01/1867	131 A.F.	3.0 cfs
Orlando Canal No. 3	5,911 ft		10/19/1903
Huerfano Valley Ditch	4,894 ft	120	2/2/1888	2,891 A.F.	42.0 cfs
Huerfano Valley Ditch		342	5/1/1905		18.0 cfs

“Consumptive use” is the term for the portion of a water diversion right that is actually consumed by its beneficial use. Where the beneficial use is agricultural irrigation, consumptive use represents the amount of water consumed by the irrigated crop or evaporated on the farm. After deducting consumptive use from the amount of water diverted and applied to irrigation, the remainder is described as “return flow” to the system. Such return flows are generally subject to appropriation downstream. Only the consumptive use portion of a given water right is subject to transfer (that is, a change in the point of diversion, place of use, or purpose of use). Therefore, water rights are often assigned monetary value based on the consumptive use portion. Although consumptive use varies by crop, rainfall, temperature and other factors, in southeastern Colorado, crops generally consume about two acre-feet of applied water for each acre planted, depending on the crops planted. In order to provide that amount of consumptive use water, an irrigator must generally apply three acre-feet of water (allowing for predictable return flow equal to about one-third of the applied water). We measure our water rights both in terms of the amount of the diversion or storage right, as the case may be, but also in terms of the historic consumptive use.

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The following table presents our holdings of storage water rights:

	Elevation	Priority No.	Appropriation Date	Average Annual Yield (A.F.)	Decreed Amount (A.F.)	Estimate of Current Effective Storage (A.F.)
Huerfano Valley Reservoir	4,702 ft	6	2/2/1888	1,424	2,017	1,000
Cucharas Valley Reservoir	5,570 ft	66	3/14/1906	3,055	31,956	Current no-fill restriction1
Cucharas Valley Reservoir	5,705 ft	66c2	3/14/1906		34,404
Orlando Reservoir #2	5,911 ft	349	12/14/1905	1,800	3,110	1,500

Purchase of Vaxa Entities

On July 31, 2019, we completed our acquisition of Vaxa Global, LLC (“Vaxa”) from Easby Land & Cattle Company, LLC pursuant to a share exchange agreement dated February 21, 2019 (the “Purchase Agreement”). Under the terms of the Purchase Agreement, we acquired 100% of the membership interest in Vaxa in exchange for 30,000,000 shares of our common stock and an earn-out arrangement for up to 20,000,000 additional shares of our common stock. The number of earn-out shares will equal the lesser of:

● The quotient of 10 times the consolidated earnings before income taxes, depreciation and amortization, or EBITDA, of Vaxa for the twelve months ending June 30, 2020, divided by $1.00; and

● 20,000,000.

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

Vaxa owns a 100% membership interest in each of Ekstrak Labs LLC and Gramz Holdings, LLC.

● Vaxa grows hemp plants for cannabidiol, or CBD, extraction;

● Ekstrak extracts CBD hemp; and

● Gramz^TMproduces and sells CBD extract in the form of both isolate and full-spectrum oil, compounds, such as Gramz Herbal Topical and Gramz Whole Plant Matrix Sublingual Drops, which have been developed to capitalize on the medicinal and therapeutic benefits of hemp.

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™.

¹See State of Colorado litigation.

²This is a conditional right while the engineering and construction of structures are completed to perfect a water right, in this case to physically store the water. The conditional right establishes a seniority date but allows time for completion of the project. Conditional rights are reviewed every six years by the water court to confirm that progress is being made on the effort to perfect the right. When a conditional water right is perfected, which can be done incrementally in the case of storage, the water right becomes absolute. In addition, the Cucharas Valley Reservoir has Conditional rights to 34,404 A.F. of additional storage.

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Results of Operations

For the Three Months Ended September 30, 2019, compared to the Three Months Ended September 30, 2018

During the three months ended September 30, 2019, we recorded revenues of approximately $108,000, compared to approximately $5,000 in the three-month period ended September 30, 2018. The increase of $103,000 was due to Vaxa acquisition.

Operating expenses during the three months ended September 30, 2019 and 2018 were approximately $328,000 and $678,000, respectively, excluding the dam demolition expense. The decrease of $350,000 was primarily due to the Company reducing its general and administrative expenses.

Other income and expenses for the three months ended September 30, 2019 and 2018 were approximately $415,000 and $176,000, respectively. The net increase of $239,000 in expenses was primarily the result of increased interest expense and a lack of gain on asset sales.

During the three months ended September 30, 2019 and 2018, we recognized a profit from continuing operations of $190,000 and a loss from continuing operations of $2,649,000, respectively.

During the three months ended September 30, 2019 and 2018, we recognized preferred distributions of approximately $6,000 and $6,000 for the accrued dividends on the preferred stock of Water Redevelopment.

As the result of the foregoing, the net profit attributed to our common shareholders for the three months ended September 30, 2019 was $184,000, compared to a net loss of $2,655 for the three months ended September 30, 2018.

In December 2018, a contingent liability was established regarding the State of Colorado’s legal action to compel the Company to demolish Cucharas #5 reservoir. In that period, the Company recognized an expense of $1,800,000. 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. In the three months ending September 30, 2019, the Company recognized a gain of $825,000 from the 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.

For the Nine Months Ended September 30, 2019, compared to the Nine Months Ended September 30, 2018

During the nine months ended September 30, 2019, we recorded revenues of approximately $145,000, compared to approximately $22,000 in the nine-month period ended September 30, 2018. The increase of $123,000 was due to the Vaxa acquisition.

Operating expenses during the nine months ended September 30, 2019 and 2018 were approximately $1,197,000 and $1,913,000, respectively. The decrease of $716,000 was primarily due to the Company reducing its general and administrative expenses.

Other income and expenses for the nine months ended September 30, 2019 and 2018 were approximately $897,000 in expenses and $11,549,000 in income, respectively. The net increase of $12,446,000 is mostly due to the recognition of the GrowCo deconsolidation.

During the nine months ended September 30, 2019 and 2018, we recognized a loss from continuing operations of $1,124,000 and a profit from continuing operations of $7,858,000, respectively.

During the nine months ended September 30, 2019 and 2018, we recognized preferred distributions of approximately $18,000 and $1,002,000. The reduction is due to the Company ceasing to record an accrual for the TR Capital’s preferred distribution as of July 2018.

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As the result of the foregoing, the net loss attributed to our common shareholders, after recognizing preferred distributions and income attributed to non-controlling interest, for the nine months ended September 30, 2019 was $1,142,000 loss, compared to a profit of $6,046,000 for the nine months ended September 30, 2018.

Liquidity and Capital Resources

Resources

We have expanded our operations relying on various funding mechanisms, including debt, convertible debt and equity capital. Since inception, we have raised and invested over $96 million to acquire, improve, integrate farm/water assets, launch related businesses, and support operations.

We believe with the anticipated influx of additional capital from strategic partners we will have sufficient capital to meet our anticipated cash needs for at least the next twelve months. In January and February 2019, the Company engaged in discussions with the Vaxa Group that would, among other things, strengthen and expand our business operations and enable the Company to raise additional capital. This acquisition of Vaxa closed on July 31, 2019. It is anticipated that this acquisition has, and will, facilitate the Company’s receipt of working capital and provide strategic, vertically integrated hemp-focused businesses.

Our future working capital requirements will depend on many factors, including the expansion of farming and water projects. To the extent our cash, cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to effect an equity or debt financing on terms acceptable to us or at all.

We historically have funded our operations primarily from the following sources:

● proceeds of private placements of equity, equity-related and debt securities of Two Rivers Water & Farming Company and subsidiaries;

● cash flow generated from operations; and

● loans and lines of credit.

At the present time we have no available line or letters of credit.

Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital. As of September 30, 2019, we had cash and cash equivalents of approximately $401,000. Cash flow used in our operating activities totaled approximately $789,000 for the nine months ended September 30, 2019 compared to operating activities using approximately $824,000 for the nine months ended September 30, 2018.

As of September 30, 2019, we had approximately $481,000 in current assets and approximately $21,585,000 in current liabilities. A large portion of the current liabilities ($7,373,000) is from the HCIC seller carryback notes, some of which were due June 30, 2016. As of September 30, 2019, we continue to be in default on the HCIC note payments. As a result, the entire amount of the notes has been classified as current.

Cash provided by investing activities was approximately $23,000 for the nine months ended September 30, 2019 compared to cash used in investing activities of approximately $30,000 for the nine months ended September 30, 2018.

Cash provided by financing activities was approximately $1,161,000 for the nine months ended September 30, 2019 compared to cash provided of approximately $894,000 for the nine months ended September 30, 2018.

Due to our financial condition, we have had to resort to borrowing under short-term convertible notes, which have high financing costs associated with them. On September 24, 2019, we executed a convertible promissory note in the principal amount of $575,000 had a purchase price of $517,500, a 6-month term, and an interest rate of 10% per annum. Net proceeds were approximately $457,500. 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. We issued 1,101,532 shares of our 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 securities purchase 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.

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On November 7, 2019, we entered into a similar convertible note arrangement to provide a net of $315,000 in short term working capital. The face value of the convertible debt is $394,500 with a purchase price of $354,600, a 6-month term and an interest rate of 12% per annum. The debt is convertible at a price equal to the lower of (1) 70% multiplied by the lowest closing bid price or trading price (whichever is lower) of Two Rivers’ common shares during the 10 trading days immediately preceding the conversion date (representing a discount rate of 30%) and (2) $0.30 per share. We issued 1,083,791 shares of our common stock (the “Returnable Shares”) to the note holder, as well as an additional 200,000 shares of Common Stock (the “Commitment Shares”), subject to the terms and conditions of the securities purchase 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.

We intend to use these funds for the payment of certain debts, payments on accounts and working capital.

Going Concern

The consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has not generated significant revenues and has a net loss of $1,142,000 during the nine months ended September 30, 2019. Cash consumed from our operations during the nine months ended September 30, 2019 was $789,000. At September 30, 2019, the Company had a working capital deficit of $21,104,000 and an accumulated deficit of approximately $95,596,000. The HCIC seller carry back debt are in technical default.

These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. The following paragraphs describe management’s plans to mitigate.

We are in the process of working with the Vaxa Entities and its funders to continue to fund Two Rivers operations. There is no assurances that this additional funding will occur.

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

Management Plans

We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results. We believe the actions will satisfy our estimated liquidity needs 12 months from the issuance of these financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional financing, or whether such actions would generate the expected liquidity as currently planned. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results from operations. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Note 2 of the notes to condensed consolidated financial statements included elsewhere in this Form 10-Q. Our preparation of such condensed consolidated financial statements and this Form 10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

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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.

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).

Impairment Policy

At least once every year, management examines all of our assets for proper valuation and to determine if an impairment is necessary. In terms of real estate owned, this impairment examination also includes the accumulated depreciation. Management examines market valuations and if an additional impairment is necessary for lower of cost or market, then an impairment charge is recorded.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and change in the market values of our real estate properties and water assets. Because we had no market risk sensitive instruments outstanding as of September 30, 2019, it was determined that there was no material market risk exposure to our consolidated financial position, results of operations, or cash flows as of such date. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosures Controls and Procedures

Our management, comprised of our chief executive officer (CEO) and chief financial officer (CFO), (presently the same person fills both officer roles), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, and taking the matters described below into account, the Company’s CEO/CFO has concluded that our disclosure controls and procedures over financial reporting were not effective during reporting period ended September 30, 2019.

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Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. “Internal control over financial reporting” is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of a company;

● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of a company are being made only in accordance with authorizations of management and directors of a company; and

● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the financial statements.

A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations, which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based upon our evaluation of internal controls, the Company’s management determined that the Company’s controls over financial reporting were not adequate to ensure complex accounting calculations were performed correctly. As such, the Company’s CEO/CFO has concluded that the Company’s disclosure controls and procedures contain a material weakness as of the end of the period covered by this Report. Because of the material weaknesses identified, a reasonable possibility exists that a material misstatement in our consolidated financial statements will not be prevented or detected on a timely basis. While our internal controls are established and followed, it is clear by the identified weaknesses that they were not operating as they should be. Management believes that this was the case due to our limited staff along with time constraints and staff turnover. However, our CEO/CFO, who is also our Principal Accounting Officer, believes that the financial statements included in this quarterly report on Form 10-Q present, in all material respects, our financial position, results of operations and cash flows for the periods presented, in conformity with U.S. GAAP.

Plan for Remediation of Material Weaknesses

The remediation effort outlined below is intended to address the identified material weaknesses in internal control over financial reporting.

Once significant additional capital is raised, we plan to hire a qualified Chief Financial Officer. A short-term task of the new CFO will be to do a formal assessment of our internal controls.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

State of Colorado litigation

Two Rivers, the State of Colorado (Office of the State Engineer and the local Division Engineer), and neighboring water rights holders have been involved in litigation concerning water rights and claims by the State concerning an existing dam in Huerfano County, Colorado, and a demand by the State to breach the dam structure. (Two Rivers Water and Farming Co. vs. Welton Land and Water Co., (Pueblo Water Court)). As part of the litigation, Two Rivers has sought to have certain water rights demands by the neighboring water rights holders deemed wasteful. In the quarter ending March 31, 2016, Two Rivers entered into a stipulation agreement with the State, settling the State’s claims, whereby Two Rivers agreed to take the existing dam structure down to the sediment level. Two Rivers was able to empty all the water in the Dam, but it was not be able to meet the requirements of the stipulation agreement by March 31, in part due to lack of capital. On April 3, 2018, Two Rivers was notified that the State had filed a motion for the issuance of a contempt of court citation based upon its failure to comply with the consent decree by March 31, 2018.

The State of Colorado also sued Mr. Harding (current CEO and acting CFO), the prior CFO, and the former directors of Two Rivers, former director and CEO John McKowen who had executed the agreement with the State for contempt for their failure to compel Two Rivers to carry out its obligations under the 2016 agreement. The five independent directors of Two Rivers resigned in November 2018. The case against Two Rivers and all the individuals had been scheduled for trial starting October 28, 2019. The Company has accrued $1,800,000 as a liability to cover the cost of deconstruction and penalties and fines.

In July 2019, the Company reached a settlement with the State of Colorado, whereby the Company will pay approximately $922,000 plus interest to the State of Colorado in exchange for a full settlement of the above legal action. The Company anticipates recognizing a reduction of this contingent liability from $1,800,000 to approximately $922,000, along with additional non-cash gains of approximately $50,000 from the negotiations and resolution of previously recorded accounts payable, on Two Rivers’ financial reports dated September 30, 2019.

Lawsuit against former employees

On October 18, 2017, at the Company filed a lawsuit against former employees of its DFP farming operation for alleged theft. We are in the process of gathering evidence of the theft and setting a court hearing date. A former employee of DFP has filed a counter claim against the Company, which amount is immaterial. Management believes that claims against former employees are in excess of any counter claims. The counter claim on the lawsuit was settled in November 2019 and the Company will pursue an insurance claim for the theft losses.

Blue & Green litigation

On January 19, 2018 Blue & Green, LLC (“Blue Green”) filed a complaint against GrowCo, Inc. claiming a default on payments by GrowCo to Blue Green under the terms of the GrowCo $2,115,000 promissory note held by Blue Green. The complaint is requesting immediate payment of the note, back due interest in excess of $300,000, and attorney fees. The Blue Green note is also secured by certain water and land property owned by Two Rivers. As a result of Blue Green’s action, the Company has recorded a contingent liability of $2,359,000, which represents a current appraisal of the assets pledged by the Company. The Company understands that GrowCo is currently in a bankruptcy proceeding.

ITEM 1A. RISK FACTORS

The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2018, 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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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 30, 2019 we issued and sold the unregistered securities set forth in the table below.

Date	Persons or Class of Persons	Securities	Consideration
July 12, 2019	TR Capital Preferred	14,840 shares of Common Stock	TR Capital Conversion
July 17, 2019	Black Mountain Equities	523,395 shares of Common Stock	Cashless exercise of warrant for previous financing
July 31, 2019	Easby Land & Cattle Company, LLC	30,000,000 shares of Common Stock	100% of Vaxa Global, LLC valued at $13,200,000
August 9, 2019	TR Capital Preferred	139,985 shares of Common Stock	TR Capital Conversion
August 14, 2019	Andrew Norstrud	185,000 shares of Common Stock	Professional services valued at $49,950
September 23, 2019	Labrys Fund, LP	1,321,838 shares of Common Stock	Financing costs valued at $355,000

We relied upon the exemption from registration contained in Section 4(a)(2) under the Securities Act, as the securities were sold only to investors, sophisticated as to the business of the Company, without the use of general solicitation or advertising. No underwriters or placement agents were used and no commissions were paid in the above stock transactions. A restrictive legend was placed on the certificates evidencing the securities issued in the above transactions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Regulation S-K Number	Document
2.1	Share Exchange Agreement dated February 22, 2019, between Two Rivers Water & Farming Company and Easby Land & Cattle Company, LLC (1)
10.1	Convertible Promissory Note dated September 19, 2019 to Labrys Fund, LP (2)
10.2	Securities Purchase Agreement dated September 19, 2019 between Two Rivers Water & Farming Company and Labrys Fund, LP (2)
31.1	Rule 13a-14(a) Certification of Greg Harrington
32.1	Certification of Greg Harrington Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Financial statements from the Quarterly Report on Form 10-Q of Two Rivers Water & Farming Company for the quarterly period ended September 30, 2019, formatted in XBRL: (i) the Balance Sheets; (ii) the Statements of Operations; (iii) the Statements of Cash Flows; and (iv) the Notes to Financial Statements (5)

(1)	Filed as an exhibit to the Current Report on Form 8-K filed February 26, 2019.
(2)	Filed as an exhibit to the Current Report on Form 8-K filed September 26, 2019.
(3)	In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TWO RIVERS WATER & FARMING COMPANY
Dated: November 25, 2019	By:	/s/ Greg Harrington
		Greg Harrington, Chief Executive Officer and Chief Financial Officer

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