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EX-32.1 - TURV MCKOWEN 32 EXHIBIT - TWO RIVERS WATER & FARMING Coexh32mckowen2010q1.htm
EX-31.2 - TURV HARDING 31 EXHIBIT - TWO RIVERS WATER & FARMING Coexh31harding2010q1.htm
EX-31.1 - TURV MCKOWEN 31 EXHIBIT - TWO RIVERS WATER & FARMING Coexh31mckowen2010q1.htm
EX-32.2 - TURV HARDING 32 EXHIBIT - TWO RIVERS WATER & FARMING Coexh32harding2010q1.htm
 
 




 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 


 
FORM 10-Q/A
 


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


For the quarterly period ended March 31, 2010
Or
 [ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _____________


Commission file number: 000-51139
Two Rivers logo
TWO RIVERS WATER COMPANY
 
 (Exact name of registrant as specified in its charter)
 


Colorado
 
13-4228144
State or other jurisdiction of incorporation or organization
 
I.R.S. Employer Identification No.
 
2000 South Colorado Boulevard, Annex Ste 200, Denver, CO 80222
 
 
(Address of principal executive offices) (Zip Code)
 
     
 
Registrant’s telephone number, including area code:
(303)222-1000
 
     
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class registered
 
Name of each exchange on which registered
Not Applicable
 
Not Applicable
 
Securities registered pursuant to Section 12(g) of the Act:
 
 
Common Stock
(Title of class)
 


 
 

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes |_| No |_|


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


Large accelerated filer
[___]
 
Accelerated filer
[___]
Non-accelerated filer
(Do not check if a smaller reporting company)
[___]
 
Smaller reporting company
[X]


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|




As of May 7, 2010 there were 11,289,583 shares outstanding of the registrant's Common Stock.


 
 

 








   
Page
Item 1
Financial Statements (Unaudited)
 
 
March 31, 2010 and  December 31, 2009
1
 
Consolidated Statements of Operations – Three months ended March 31, 2010 and 2009
2
 
Consolidated Statements of Cash Flows – Three months ended March 31, 2010 and 2009
3
 
5
 
6
Item 2
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
33
Item 3
Quantitative and Qualitative Disclosures About Market Risk
39
Item 4
Controls and Procedures
40
Item 4T
Controls and Procedures
40
 
 
Item 1
Legal Proceedings
42
Item 2
Changes in Securities
42
Item 3
Defaults Upon Senior Securities – Not Applicable
43
Item 4
Submission of Matters to a Vote of Security Holders
43
Item 5
Other Information – Not Applicable
43
Item 6
Exhibits
44
 
45




EXPLANATORY NOTE


Two Rivers Water Company, (the “Company”), is filing this Amendment to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 filed with the Securities and Exchange Commission on May 14, 2010, for the sole purpose of restating the Financial Statements and the Notes to the Financial Statements included in Part I, Item 1 of this filing.  An explanation of the changes to the financial statements can be found in Note 2 Summary of Significant Accounting Policies – Restatement.


This Amendment does not reflect events occurring after the Original Filing except as noted above. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and the Company has not otherwise updated disclosures contained therein or herein to reflect events that occurred at a later date.


 
 

 


TWO RIVERS WATER COMPANY AND SUBSIDIARIES
   
March 31, 2010
   
December 31, 2009
 
ASSETS:
 
RESTATED
Unaudited
   
Audited
 
Current Assets:
           
Cash and cash equivalents
  $ 713       616  
Note receivable - Aegis/Grizzle (Note 4)
    -       295  
Accrued interest receivable
    1       4  
Advances and accounts receivable
    55       1  
Income taxes receivable (Notes 2, 8)
    428       489  
Deposits
    202       202  
Prepaid expenses
    9       16  
Assets held for sale
    -       134  
Total Current Assets
    1,408       1,757  
Property, equipment and software, net (Note 2)
    119       94  
Other Assets
               
Mortgages receivable - Net of allowance for bad debts of $139 on Mar 31, 2010 and Dec 31, 2009 (Notes 2, 4)
    232       232  
Investment in Boston Property, net of impairment of $955 and $889 on March 31, 2010 and on December 31, 2009, respectively (Note 3)
    2,080       2,073  
Land (Notes 2, 3)
    1,324       991  
Water shares (Notes 2, 3)
    24,196       2,267  
Options on real estate (Notes 2, 3)
    -       2,586  
Dam Construction (Note 3)
    265       163  
Other real estate owned - net of impairment of $166 and $313 and accumulated depreciation of $24 and $40 on March 31, 2010 and December 31, 2009, respectively (Note 2)
    609       1,042  
Farm product
    22       -  
Total Other Assets
    28,728       9,354  
TOTAL ASSETS
  $ 30,255       11,205  
                 
LIABILITIES & STOCKHOLDERS' EQUITY:
               
Current Liabilities:
               
Accounts payable
  $ 284       281  
Short term borrowings  (Note 5)
    950       950  
Deposits held
    31       30  
Accrued liabilities
    36       5  
Total Current Liabilities
    1,301       1,266  
Notes Payable - Long Term (Note 5)
    6,831       2,175  
Total Liabilities
    8,132       3,441  
                 
Stockholders' Equity:
               
Common stock, $0.001 par value, 100,000,000 shares authorized, 11,049,583 and  9,214,583 shares issued and outstanding at Mar 31, 2010 and Dec 31, 2009, respectively
    11       9  
Additional paid-in capital
    11,188       9,200  
Accumulated (deficit)
    (4,981 )     (4,120 )
Total Two Rivers Water Company Shareholders' Equity
    6,218       5,089  
Noncontrolling interest in subsidiaries (Note 2)
    15,905       2,675  
        Total Stockholders' Equity
    22,123       7,764  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 30,255       11,205  


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


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 1



TWO RIVERS WATER COMANY AND SUBSIDIARIES
(Unaudited)


   
Three Months Ended
 
   
March 31, 2010
   
March 31, 2009
 
             
Revenue
           
Loan Fees and real estate income
  $ 30       11  
Interest revenues
    4       35  
Member assessments
    18       -  
Total Revenue
    52       46  
Direct cost of revenue
    27       7  
Gross Profit
    25       39  
Operating Expenses:
               
    General and administrative
    736       117  
    Depreciation and amortization
    5       3  
        Total operating expenses
    741       120  
(Loss) from operations
    (716 )     (81 )
                 
Other income (expense)
               
   Gain on sale of investments
    -       64  
   Interest income
    -       3  
   Interest (expense)
    (58 )     (2 )
Other income (expense)
    (10 )     (13 )
   Total other income (expense)
    (68 )     52  
Net (Loss) from continuing operations before taxes
    (784 )     (29 )
                 
Income tax benefit (expense) (Note 8)
    -       -  
Net (Loss) from continuing operations
    (784 )     (29 )
                 
Discontinued Operations (Note 10)
               
Loss from operations of discontinued real estate and mortgage business (including gain on disposal of real estate of $8 and $0 for 3 months ending March 31, 2010 and March 31, 2009, respectively)
    (150 )     (622 )
Income tax benefit
    -       62  
(Loss) on discontinued operations
    (150 )     (560 )
                 
Net (Loss)
    (934 )     (589 )
                 
Less net loss attributable to the noncontrolling interest (Note 2, 7)
    73       -  
                 
Net (Loss) attributed to Two Rivers Water Company
  $ (861 )     (589 )
(Loss) Per Share - Basic:
               
(Loss) from continuing operations
    (0.08 )     (0.00 )
(Loss) from discontinued operations
    (0.01 )     (0.07 )
Total
    (0.09 )     (0.07 )
                 
Weighted Average Shares Outstanding:
               
   Basic
    10,132       8,957  


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


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 2





TWO RIVERS WATER COMPANY AND SUBSIDIARIES
(Unaudited)
   
For the three months
ended March 31,
 
   
2010
   
2009
 
Cash Flows from Operating Activities:
           
Net (Loss) Income
  $ (934 )   $ (589 )
Adjustments to reconcile net income or (loss) to net cash used in operating activities:
         
Depreciation (including discontinued operations)
    15       16  
(Decrease) in bad debt allowance on note receivables
    -       (136 )
Increase in reserves and impairments
    80       440  
Recapture of impairments from REOs sold
    (161 )     -  
(Gain) from REOs sold (discontinued operations)
    (8 )     -  
(Gain) on sale of investments and assets held
    (40 )     (64 )
Stock based compensation and warrant extension
    267       25  
Noncontrolling interest in net loss
    73       9  
Changes in operating assets and liabilities:
               
(Decrease) in deferred revenue
    -       (6 )
(Increase) decrease in accounts receivable
    (55 )     4  
Decrease (increase) in accrued interest receivable
    4       -  
Decrease in prepaid expenses and other assets
    7       16  
Decrease in mortgage loans receivable
    -       695  
(See Supplemental Information below)
               
Decrease (increase) in income tax receivable
    61       (221 )
Increase (decrease) in accounts payable
    4       (36 )
Increase (decrease) in accrued liabilities and other
    32       (99 )
Net Cash (Used in) Operating Activities
    (655 )     54  
                 
Cash Flows from Investing Activities:
               
Investments (increased)/decreased
               
Boston real estate
    (73 )     (216 )
Marketable securities purchased
    -       (37,539 )
Proceeds from marketable securities sold
    -       37,416  
Proceeds from REO properties sold
    387       136  
Proceeds from asset held for sale
    176       -  
Purchase of property, equipment and software
    (35 )     (3 )
Proceeds from fixed assets sold
    -       3  
Purchase of land, water shares, and options
    (5,570 )     -  
Dam construction
    (102 )     -  
Farm product
    (22 )     -  
Net Cash Provided by/(Used in) Investing Activities
    (5,239 )     (203 )
                 
Cash Flows from Financing Activities:
               
Increase in long term borrowings
    4,656       -  
Private placement - net of placement costs
    1,335       -  
Retirement of Common Stock
    -       (68 )
Net Cash Provided by Financing Activities
    5,991       (68 )
Net (Decrease) in Cash & Cash Equivalents
    97       (217 )
Beginning Cash & Cash Equivalents
    616       874  
Ending Cash & Cash Equivalents
  $ 713     $ 657  
Continued on next page


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 3



 
Continued from previous page


Supplemental Disclosure of Cash Flow Information
           
Non cash settlement on short term mortgages and transfers
  $ -     $ 482  
Non-controlling interest
  $ (168 )   $ -  
Cash paid for Interest
  $ 75     $ 29  
Cash paid for Income Taxes
  $ -     $ 239  
Cash received from Income tax refunds
  $ 61     $ -  
Common stock issued for land and water share purchase
  $ 500     $ -  
Conversion of note receivable for loan on land
  $ 295     $ -  
Increase in Water Shares due to acquisition costs
  $ 174     $ -  


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


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 4



TWO RIVERS WATER COMPANY AND SUBSIDIARIES
(RESTATED)
For the Year Ended December 31, 2009 and 2008   (In thousands)
(Unaudited)
                     
Accumulated
                   
   
Voting
   
Additional
   
Other
   
Non-
         
Stockholders'
 
   
Common Stock
   
Paid-in
   
Comprehensive
   
Controlling
   
Accumulated
   
Equity
 
   
Shares
   
Amount
   
Capital
   
Income
   
Interest
   
(Deficit)
       
                                           
Balances, December 31, 2007
    8,924     $ 9      $ 8,758      $ 1,578      $ -     $ (1,377 )    $ 8,968  
                                                         
Net Income
    -       -       -       -       -       182       182  
Options exercised
    100       -       5       -       -       -       5  
Change in unrealized gains
    -       -       -       (1,578 )     -       -       (1,578 )
Stock-based compensation expense
    -       -       114       -       -       -       114  
Retirement of Stock- open market purchases
    (5 )     -       (4 )     -       -       -       (4 )
Balances, December 31, 2008
    9,019      $ 9       8,873       -       -       (1,195 )     7,687  
                                                         
Net (Loss)
    -       -       -       -       (175 )     (2,925 )     (3,100 )
Stock-based compensation expense
    -       -       118       -       -       -       118  
Retirement of Stock - open market purchases
    (155 )     -       (94 )     -       -       -       (94 )
Stock purchased through private placement
    150       -       150       -       -       -       150  
Options exercised
    200       -       10       -       -       -       10  
Recovered BPZ stock
    -       -       143       -       -       -       143  
Non-controlling interest in a subsidiary
    -       -       -       -       2,850       -       2,850  
Balances, December 31, 2009
    9,214      $ 9       9,200       -       2,675       (4,120 )     7,764  
                                                         
Net (Loss)
    -       -       -       -       (73 )     (861 )     (934 )
Non-controlling interest in subsidiaries
    -       -       -       -       (71 )     -       (71 )
Stock-based compensation expense
    -       -       217       -       -       -       217  
Warrant extension expense
    -       -       50       -       -       -       50  
Stock issued in exchange for land and water shares
    500       1       499       -       -       -       500  
Valuation of Mutual Ditch Company
    -       -               -       13,374       -       13,374  
Stock purchased through private placement
    1,335       1       1,334       -       -       -       1,335  
Direct cost of private placement
    -       -       (112 )     -       -       -       (112 )
Balances, March 31, 2010
    11,049     $ 11      $ 11,188      $ -      $ 15,905      $ (4,981 )    $ 22,123  


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


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 5



TWO RIVERS WATER COMPANY AND SUBSIDIARIES
For the Three Months Ended March 31, 2010 and March 31, 2009
(Restated)
(Unaudited)


NOTE 1 - ORGANIZATION
 
GENERAL
 


Two Rivers Water Company (“Two Rivers” or “the Company”) was incorporated in December 2002 in the state of Colorado, as a wholly owned subsidiary of Navidec Inc. ("Old Navidec"). The Company was formerly known as Navidec Financial Services, Inc. until it changed its name on November 19, 2009 to Two Rivers Water Company.  The Company’s operations are primarily centered in Colorado.


On August 17, 2009 HCIC Holdings, LLC (“HCIC”), a Colorado limited liability company, was formed to acquire and operate the a water business consisting of ownership of water rights, storage of water and distribution of water (the “Water Business”).  The Company owns 50% of HCIC, through its 100% owned subsidiary, TRWC, Inc.  The other owner of 50% of HCIC is Two Rivers Basin LLC (“TRB”); a Colorado limited liability company.


On March 17, 2010, the Company formed Two Rivers Farming, LLC (“Farming”) to acquire and operate agriculture land either as a sole operator or in joint venture with other individuals and companies (the “Farming Business”).  Two Rivers is Farming’s sole member and owner.  Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farming, LLC.


On March 17, 2010, the Company formed Two Rivers Energy, LLC (“Energy”), a Colorado limited liability company, to produce alternative energy on land owned by the Company, or the Company’s subsidiaries.  Two Rivers is Energy’s sole member and owner.  The Company plans to develop alternative energy equipment and the subsequent production of alternative energy primarily from solar energy which might be operated through a joint venture with one or more other entities which are not yet determined (the “Energy Business”). Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.


In addition, Two Rivers operates the following businesses: (a) property management and residential real estate brokerage in Arizona, and (b) development of a three unit residential condominium in Boston Massachusetts.   The Company is in the process of liquidating its real estate and mortgage assets through the sale of residential properties acquired through foreclosure and the sale or payoff of the two remaining mortgages it holds.


The Company intends to focus its entire efforts on the development of the Water, Farming and Energy Businesses.  Therefore, the Company is winding down and/or disposing of its other businesses.  The Company is in the process of completing the purchase of the remaining outstanding shares of Huerfano-Cucharas Irrigation Company; a Colorado Mutual Ditch Company (the “Mutual Ditch Company”) located in Huerfano and Pueblo counties in the State of Colorado and additional land, which would assist in perfecting water rights and provide additional water resources.  As of March 31, 2010 HCIC had a 71% ownership in the Mutual Ditch Company.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 6

 
The Mutual Ditch Company owns a large privately held, on-stream reservoir of 41,200 acre feet capacity with associated direct flow and storage rights and a mutual ditch water distribution system that holds easement rights into the Arkansas River.


The Company’s objective is to develop the Mutual Ditch Company’s water resources and enhance water storage capacity to the fully permitted 41,200 acre feet through a major dam and structure renovation and improvement project.  Along with developing water resources, the Company is purchasing farmland, farming the land and intends to supply alternative energy to the Colorado market.


SUBSIDIARIES


Two Rivers is the parent company and owns 100% of TRWC, Inc., Two Rivers Farming and Two Rivers Energy.   Two Rivers also owns 50% of HCIC Holdings, LLC.  HCIC Holdings LLC owns 71% of the Mutual Ditch Company as of March 31, 2010.  Two Rivers owns 98% of Northsight, Inc.   Northsight owns 100% of Southie Developments and Legendary Investment Group.


TRWC, INC. (formerly Two Rivers Water Company)


On July 28, 2009, the Company formed Two Rivers Water Company, a Colorado corporation.  On November 19, 2009, with shareholder approval, the Company changed its parent name from Navidec Financial Services, Inc. to Two Rivers Water Company.  Simultaneously the Company changed the original Two Rivers Water Company’s name to TRWC, Inc. (“TRWC”).  The Company owns 100% of TRWC.


HCIC HOLDINGS, LLC


Two Rivers currently operates a water acquisition, development and distribution business in Huerfano County, Colorado through its 50% owned subsidiary HCIC, which at December 31, 2009 had an 18% ownership in the Mutual Ditch Company.  As of March 31, 2010, HCIC owned 71% of the Mutual Ditch Company.  As of April 30, 2010, HCIC owned 74% of the Mutual Ditch Company and had under contract to purchase another 16% of the Mutual Ditch Company.


On August 17, 2009, Two Rivers, through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture.  Under the terms of the joint venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009 the Company had contributed $1,807,000 in HCIC.  At May 6, 2010, the Company has contributed $3,670,000 to HCIC and the related Water Project.  As of March 31, 2010 the Company has contributed $637,000 over its $2,850,000 capital contribution.  The capital contribution was eliminated in the consolidation with HCIC.


Further, due to the Company being the sole contributor of operational cash, without which HCIC would be unable to operate, the Company is treating its investment in HCIC as a Variable Interest Entity (“VIE”) and under US GAAP should consolidate HCIC.


In coming to the conclusion to consolidate HCIC, the Company researched the authoritative literature as it pertains to the equity method of accounting and joint ventures (ASC 323.10.15).  Other considerations to be examined if there is a VIE relationship which pertains to the Company includes representation on the board of directors; participating in policy-making processes, and the interchange of managerial personnel (ASC 323.10.15-6).  Further, accounting standards require valuing TRB’s contribution in HCIC at fair value, which is estimated to be $2,850,000.
 


 
Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 7

 
Before the formation of HCIC on August 17, 2009, TRB paid $130,000 to 93% of the shareholders of the Mutual Ditch Company for the right to purchase the shares of the Mutual Ditch Company.  During the three months ended September 30, 2009, HCIC paid $70,000 to extend the option to purchase land and water shares from shareholders of the Mutual Ditch Company.  If the land and water shares are purchased, the option payments will reduce the purchase price.  As of March 31, 2010, HCIC owned 71% of the Mutual Ditch Company.  As of April 30, 2010, HCIC exercised additional options to bring HCIC ownership of the shares of the Mutual Ditch Company to 74%.  Although the previous options have expired, management is attempting to acquire over 90% of the Mutual Ditch Company.  The Company holds option extensions to close an additional 16% of the Mutual Ditch Company shares.


HUERFANO-CUCHARAS IRRIGATION COMPANY


Huerfano-Cucharas Irrigation Company; a Colorado Mutual Ditch Company is located in Huerfano and Pueblo counties in the State of Colorado.  The Mutual Ditch Company owns water rights, water storage and distribution systems in Huerfano and Pueblo counties.  As of March 31, 2010, HCIC owned 71% and as of April 30, 2010 owned 74% of the Mutual Ditch Company.


TWO RIVERS FARMING, LLC


The Company formed Two Rivers Farming, LLC to reintroduce agriculture activity in Huerfano and Pueblo counties in Colorado.  With the planned re-construction of the main reservoir (the Cucharas Reservoir) owned by the Mutual Ditch Company, Farming plans to lease water from the Mutual Ditch Company to begin to produce agriculture crops.


Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farming, LLC.


Farming is planning operations to prepare 500 acres of land for planting in the 2010 growing season.


TWO RIVERS ENERGY, LLC


The Company formed Two Rivers Energy, LLC to focus on the production of alternative energy.  As of March 31, 2010, there are no assets being held in Energy.  Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.


HCIC holds a real estate contract to purchase 1,800 acres that is served by the Mutual Ditch Company.


The Company is in the process of seeking financing and a joint venture partner to develop their energy business.


LEGENDARY INVESTMENT GROUP, LLC


Legendary Investment Group, LLC (“Legendary”) is a limited liability company under the laws of the state of Arizona.  It was formed in October 2008 and in December 2008 became a 100% owned subsidiary of Northsight.  Northsight acquired Legendary based on Northsight’s ability to fund and expand Legendary’s business.   There is no formal amount of future funding and expansion and Northsight can withdrawal their funding at any time without material future financial exposure.  Legendary’s business is in Arizona and focused on residential investors and property management.  Legendary has assisted the Company with the management and selling of Arizona property owned by the Company.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 8

 
Legendary has expanded its residential property management service to properties in the Phoenix area that are not owned by the Company.


NORTHSIGHT, INC. (formerly Navidec Mortgage Holdings, Inc.) – Discontinued Operations


In early 2009 Northsight discontinued its short term bridge lending in an effort to reduce its exposure to credit risk.  No new loans have been granted since early 2009.  As of March 31, 2010 and December 31, 2009, Two Rivers had $231,000 (net of an allowance for impairment of $139,000) in short term bridge loans outstanding.


SOUTHIE DEVELOPMENTS,LLC – Discontinued Operations


Two Rivers formed a Colorado limited liability company, Southie Developments, LLC, (“Southie”) on January 31, 2008, as its sole and managing member.  Southie was organized to develop residential real estate for resale and to own and manage residential real estate acquired via foreclosure of real estate loans owned by Two Rivers.  Once a real estate loan defaults and Two Rivers obtains title to the collateral, Two Rivers transfers the property to Southie for development and management.  As part of the management and development of the properties transferred to it, Southie honors any existing residential leases and will potentially expend monies for rehabilitation of the property with the option of selling the property in a short time period, usually less than one year.  However, if Southie deems the property to be a good longer term investment, they might hold the property for periods longer than 12 months.  At March 31, 2010, Southie owned four properties and one development property, as discussed below.


In November 2007, Northsight purchased 56 Thomas Park, South Boston, Massachusetts 02127, a residential property, for $1,200,000 (“Thomas Park Property”). The Thomas Park Property is a 6,000 square feet single family residence that Northsight is converting into three 2,000 square feet individual condominium single family units. Northsight expects to purchase additional properties in the Boston area market to develop and sell or rent. As of May 19, 2008, Southie acquired a $1,200,000 construction loan with Mt. Washington Cooperative Bank for the development of the Thomas Park Property. The loan is due on June 1, 2010 with monthly interest only payments, at prime plus 2% interest rate and an interest rate floor of 7%.  As of December 31, 2009, the balance owed on the loan was $950,000.   Previously, this loan was due on November 19, 2009 but was extended to June 1, 2010.  As part of the agreement to extend the loan a principal reduction was due and an establishment of a restricted cash account to cover interest payments until June 1, 2010.   The restricted cash account was not established until January 12, 2010 and totaled $46,000.  As of March 31, 2010, the Company had invested $3,035,000 including the bank construction loan of $950,000.  The Thomas Park Property is now listed for sale.  Management is attempting to renegotiate a loan due date extension with Mt. Washington Cooperative Bank.


At March 31, 2010, Southie had two residential properties in Arizona and one property in Colorado acquired by foreclosure or deed-in-lieu process.  At March 31, 2010, the carrying value of these properties was $609,000 (net of $166,000 impairment and $24,000 in accumulated depreciation).


Effective January 1, 2010, Two Rivers transferred 100% of its ownership of Southie to Northsight.






Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 9





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


The unaudited consolidated financial statements and related notes for the three months ended March 31, 2010 and 2009, presented herein have been prepared by the management of Two Rivers and its subsidiaries pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.  Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the full year. It is suggested that these unaudited consolidated financial statements be read in conjunction with the December 31, 2009 audited consolidated financial statements.


In the opinion of management, all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of operating results for the interim period presented have been made.


Restatement of Results


Subsequent to the issuance of both the Company's audited financial statements for the year ended December 31, 2009 and its unaudited financial statements for the quarterly periods ended March 31, 2010 and June 30, 2010 and to the issuance of a professional valuation of the Mutual Ditch Company issued October 29, 2010,  the Company deemed that it was necessary to restate its financial statements for the quarters ended March 31, 2010 and June 30, 2010 as contained in its Quarterly Reports on Form 10Q, filed May 14, 2010 and August 16, 2010, respectively.


Beginning with the quarter ending September 30, 2009, the Company consolidated the financial results of HCIC.  As of December 31, 2009, HCIC owned 18% of the Mutual Ditch Company.  During the quarter ended March 31, 2010, HCIC purchased additional shares of the Mutual Ditch Company and owned 71% of the Mutual Ditch Company shares.   For the quarters ended March 31, 2010 and June 30, 2010, the Company estimated the value of the Mutual Ditch Company to be equal to the valuation of the price paid for shares in the Mutual Ditch Company plus the valuation of the options contributed by TRB.  The Company consolidated HCIC and the Mutual Ditch Company based on this valuation, pending a formal appraisal.  (See Principles of Consolidation.)


On October 29, 2010, the Company received a valuation of the Mutual Ditch Company.  The valuation of the Mutual Ditch Company as of March 2, 2010 is estimated to be $24,196,000.   Therefore, the valuation of the asset “Water Shares (HCIC)” along with a reduction of the “Options on real estate” was restated to reflect this new valuation.  The corresponding offset increased the valuation of the non-controlling interest to its fair value.


In accordance with ASC 820 Fair Value Measurements and Disclosures, the ASC establishes a framework for measuring fair value, establishes a fair value hierarchy based on inputs used to measure fair value, and expands disclosure about fair value measurements. Adopting this statement has not had an effect on the Company’s financial condition, cash flows, or results of operations.


In accordance with ASC 820, the financial instruments have been categorized, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels, as follows:


Level 1.  Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g. U.S. Government securities and active exchange traded equity securities.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 10

 
Level 2.  Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g. certain corporate and municipal bonds and certain preferred stocks).  This includes (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.


Level 3.  Inputs that are unobservable.  Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instruments (e.g. certain structured securities and privately held investments).


The professional appraisal of the Mutual Ditch Company used Level 2 inputs whereby the water rights were valued using comparable prices in markets that are not active.  The infrastructure of the Mutual Ditch Company, including water storage, ditches and diversion points, was valued at replacement cost less physical obsolescence and deterioration.  The increase in the value of the asset did not have any effect on the Company’s unaudited statement of operations for the three months ended March 31, 2010.


   
March 31, 2010
 
               
Restated
 
ASSETS:
 
Unaudited
   
Adjustments
   
Unaudited
 
Current Assets:
                 
Cash and cash equivalents
  $ 713            $ 713  
Restricted cash
                  -  
Advances and accounts receivable
    56             56  
Income taxes receivable
    428             428  
Deposits and prepaid expenses
    211             211  
Total Current Assets
    1,408             1,408  
                       
  Property, equipment and software, net (Note 2)
    119             119  
                       
Other Assets
                     
Mortgages receivable - Net of allowance for bad debts
    232             232  
Investment in Boston Property, net of impairment
    2,080             2,080  
Land
    1,324             1,324  
Water shares (HCIC)
    8,175       16,021       24,196  
Options on real estate
    2,647       (2,647 )     -  
Dam Construction
    265               265  
Other real estate owned - net of impairment and accumulated depreciation
    609               609  
Farm product
    22               22  
Other assets
    -               -  
Total Other Assets
    15,354               28,728  
TOTAL ASSETS
  $ 16,881       13,374      $ 30,255  


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 11





               
LIABILITIES & STOCKHOLDERS' EQUITY:
             
Current Liabilities:
             
Accounts payable
  $ 284        $ 284  
Short term borrowings
    950         950  
Accrued liabilities
    67         67  
Total Current Liabilities
    1,301         1,301  
                   
Notes Payable - Long Term
    6,831         6,831  
Total Liabilities
    8,132         8,132  
                   
Stockholders' Equity:
                 
Common stock
    11         11  
Additional paid-in capital
    11,188  
 
    11,188  
Accumulated (deficit)
    (4,981 )       (4,981 )
Total Two Rivers Water Company Shareholders' Equity
    6,218         6,218  
Noncontrolling interest in subsidiaries
    2,531  
        13,374
    15,905  
        Total Stockholders' Equity
    8,749         22,123  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 16,881  
        13,374
   $ 30,255  




Principles of Consolidation


The accompanying consolidated financial statements include the accounts of Two Rivers and its subsidiaries, TRWC, HCIC, Mutual Ditch Company, Farming, Energy, Legendary, Northsight, and Southie. As of March 31, 2010 and December 31, 2009, Northsight had a negative stockholders’ deficit, therefore, the consolidated financial statements do not include a provision for a liability for minority interest.  All significant inter-company balances and transactions have been eliminated in consolidation.


On August 17, 2009, Two Rivers through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture.  Under the terms of the Joint Venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009, the Company had contributed $1,807,000.  At May 6, 2010, the Company had contributed $3,670,000 to HCIC and the related Water Project.  As of March 31, 2010 the Company has contributed $637,000 over its $2,850,000 capital contribution.  The capital contribution was eliminated in the consolidation with HCIC.


Further, due to the Company being the sole contributor of operational cash, without which HCIC would be unable to operate, the Company is treating its investment in HCIC as a Variable Interest Entity (VIE) and under US GAAP should consolidate HCIC.


In coming to the conclusion to consolidate HCIC, the Company researched the authoritative literature as it pertains to the equity method of accounting and joint ventures (Section 323.10.15).  Other considerations to be examined if there is a VIE relationship which pertains to the Company includes representation on the board of directors; participating in policy-making processes, and the interchange of managerial personnel (Section 323.10.15-6).  Further, accounting standards require valuing TRB’s contribution in HCIC at fair value, which is estimated to be $2,850,000.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 12

 
Before the formation of the HCIC on August 17, 2009, TRB paid $130,000 to 93% of the shareholders of the Mutual Ditch Company for the right to purchase the shares of the Mutual Ditch Company.  During the three months ended September 30, 2009, HCIC paid $70,000 to extend the option to purchase land and water shares from shareholders of the Mutual Ditch Company.  If the land and water shares are purchased, the option payments will reduce the purchase price.  If these options are not exercised by HCIC, then the full option payments of $210,000 will be forfeited by HCIC.  As of April 30, 2009, HCIC exercised options for 74% of the shares of the Mutual Ditch Company.  The remaining options have expired; although management is attempting to acquire over 90% of the Mutual Ditch Company.  As of March 31, 2010, HCIC owned 71% of the Mutual Ditch Company, and has consolidated the Mutual Ditch Company into HCIC.


On March 17, 2010, Two Rivers formed Two Rivers Farming, LLC and Two Rivers Energy, LLC as its wholly-owned subsidiaries.  Therefore, 100% of Farming and Energy operations and balance sheets are consolidated into Two Rivers.


Non-controlling Interest


Non-controlling interest is recorded for the entities HCIC and the Mutual Ditch Company that are consolidated but are not wholly owned by the Company.


Below is the breakdown of the non-controlling interests’ share of losses.


(in thousands)
 
Three months ending March 31, 2010
   
Year ending December 31, 2009
 
HCIC Holdings, LLC
  $ 43       175  
Mutual Ditch Company
    30       -  
Total
  $ 73     $ 175  


Reclassification


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


Use of Estimates


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


Cash and Cash Equivalents


For purposes of reporting cash flows, 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, notes receivable and trade accounts receivable.  The Company maintains its cash and investment balances in the form of bank demand deposits, money market accounts, commercial papers and short-term notes with financial institutions 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.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 13

 
As of March 31, 2010, the Company had $478,000 in an individual bank demand deposit, of which $250,000 is covered by FDIC insurance.  All other bank accounts were under the FDIC insurance limit of $250,000.


As of March 31, 2010, the Company had $6,000 in cash in a stock brokerage account, and $26,000 in securities represented by 20,000 shares of the Company’s stock, which the Company plans to retire.  Stockholders’ equity at March 31, 2010 has been adjusted to reflect outstanding shares as if the 20,000 shares had already been retired.


Management reviews accounts receivable periodically and reduces the carrying amount by a valuation allowance that reflects management's best estimate of amounts that may not be collectible.  Allowances, if any, for uncollectible accounts receivable are determined based upon information available and historical experience.  As of March 31, 2010 and December 31, 2009, there was an allowance of $139,000 against a long term mortgage balance of $371,000.


No revenues to unaffiliated customers represented 10% or more of the Company’s revenue for the year ended December 31, 2009 and for the three months ended March 31, 2010.


Notes Receivable


The Company carries its notes receivable at cost or loan balance, subject to the valuation procedures described below.  The book value of these financial instruments is representative of their fair values. As of March 31, 2010 and December 31, 2009 the Company had a total of $232,000 invested in mortgages receivable, net of an allowance for bad debt of $139,000.


Interest is accrued monthly on notes receivable as earned and is no longer accrued if the loan becomes more than 90 days past due.  The Company provides a valuation for certain loans that are delinquent.  The valuation account is netted against notes receivable.  As of March 31, 2010, no interest was being accrued on the two remaining loans, since one loan is in default and under legal action and the other mortgage note is current with no accrued interest due.


Investments


Investments in publicly traded equity securities over which Two Rivers does not exercise significant influence are recorded at market value in accordance with ASC 320 "Investments - Debt and Equity Securities," which requires that all applicable investments be classified as trading securities, available for sale securities or held-to-maturity securities. Comprehensive income includes net income or loss and changes in equity from the market price variations in stock and warrants held by the Company.


Investments in non-publicly traded equity securities or non-marketable equity securities are stated at the lower of cost or estimated realizable value.


Other Real Estate Owned


Other real estate owned is comprised of real estate and other assets acquired through foreclosure, acceptance of a deed in lieu of foreclosure or otherwise acquired from the debtor in lieu of repayment of the debt.  Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  Revenues, expenses and subsequent adjustments to fair value less estimated costs to sell are classified as expenses for other real estate owned. Depreciation is taken on property held and rented or with intent to rent.  Depreciation on residential real estate is computed straight-line over 27.5 years.


Land is carried at cost and is not depreciated.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 14

 
Intangibles




Intangibles with an indefinite life.  As of March 31, 2010 the estimated fair value of the intangible asset with an indefinite life is $8,175,000, consisting of the purchase price of water rights acquired through the Company’s purchase of stock in the Mutual Ditch Company.   The water shares will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado.  Once per quarter, Management will assess the value of the water rights held, and in their opinion, if the rights have become impaired, Management will establish an allowance against the water rights.


Impairments


The market values of our assets are assessed quarterly by Management.  If the current market value is less than the net carrying value of the assets, an impairment charge is taken.  Subsequently, if market value recovers and the asset is held for sale, the impairment taken is recaptured, up to the amount of the accumulated impairment for each asset.  If the asset is held for long term, and the market value recovers, no recapture of impairment will be made.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 15







Part 1—Real estate owned at end of period (in thousands)
   
Part 2—Rental income (in thousands)
 
Column A—List classification of property as indicated below
 
Column B—Amount of encum-brances
   
Column C—Initial cost to company
   
Column D—Cost of improve-ments, etc.
   
Column E—Amount at which carried at close of period
   
Column F—Reserve for depreciation and impairments
   
Column G—Rents due and accrued at end of period
   
Column H—Total rental income applicable to period
   
Column I—Expended for interest, taxes, repairs and expenses
   
Column J—Net income applicable to period
 
Farms
                                                     
Residential
                                                     
Arizona
   $ 0       263       2       265       67       0       13       3       10  
Colorado
    0       407       5       412       45       0       23       16       7  
Massachusetts
    950       1,200       1,835       3,035       955       0       0       0       0  
                                                                         
Apartments and business
    0       0       0       0       0       0       0       0       0  
Unimproved
    0       0       0       0       0       0       0       0       0  
VA
    0       123       0       123       79       0       0       1       (1 )
CO
    600       1,324       0       1,324       0       0       0       1       (1 )
      Total
    1,550       3,317       1,842       5,159       1,146       0       37       21       16  
Rent from properties sold during period
                                                                       
AZ
                                                    3       2       1  
      Total
   $ 1,550       3,317       1,842       5,159       1,146       0       40       23       17  




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 16





Real Estate Detail  (in thousands)
 
Boston Property
   
Other Real Estate Owned
   
Total
 
Beginning Balance January 1, 2010:
  $ 2,073     $ 2,033     $ 4,106  
Additions during the period:
                       
Acquisitions through foreclosure
                    0  
Other acquisitions
            342       342  
Improvements, etc.
    73       2       75  
Other (describe) – impairment & depreciation reclassification
            66       66  
Deductions during the period:
                       
Cost of  real estate sold
            (487 )     (487 )
Impairments
    (66 )     (19 )     (85 )
Other (describe) - depreciation
            (4 )     (4 )
Ending Balance, Mar 31, 2010
  $ 2,080     $ 1,933     $ 4,013  


Property and Equipment


Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation is computed principally on the straight-line method over the estimated useful life of each type of asset which ranges from three to seven years.  Leasehold improvements are amortized over the remaining term of the applicable leases or their useful lives, whichever is shorter.  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
   
March 31, 2010
   
December 31, 2009
 
Office equipment & Furniture
    5 – 7     $ 100,000     $ 86,000  
Computers
    3       60,000       52,000  
Vehicles
    5       32,000       -  
Website
    3       2,000       2,000  
Subtotal
            194,000       140,000  
Less Accumulated Depreciation
            75,000       46,000  
Net Book Value
          $ 119,000     $ 94,000  




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 17





Fair Value of Financial Instruments


The carrying value of cash and cash equivalents, trade receivables and payables approximated their fair value because of their short-term nature. Investments in debt securities are recorded at their amortized cost, which approximates fair value because of their short-term maturity.  Investments in marketable equity securities are recorded at fair value based upon quoted market prices.  Investments in non-marketable equity securities are based upon recent sales of similar securities by the investees and approximated their carrying value.  The Company’s borrowings approximate their carrying amounts based upon interest rates currently available to the Company.


Revenue Recognition


Mortgage Revenues - When active in the residential mortgage loan business, the Company primarily recognized its operating revenue through its subsidiary, Northsight, Inc., by charging origination fees from borrowers and earning interest and penalty fees on outstanding loan balances.  Northsight recognizes fee and interest income on bridge, asset and conventional mortgage loans after mortgage loan transactions close.


Until early 2009, when the Company ceased doing mortgage loans, Northsight acted as the mortgage broker and Two Rivers acted as the mortgage banker.  Northsight recognizes the origination and associated fees in placing a loan when the loan is closed.  However, since the statements are consolidated and Two Rivers is the mortgage banker, under ASC 310, Two Rivers, and the consolidated financial statements of Two Rivers, defers the revenue from the origination and associated fees over the expected life of the loan, which is usually 90 days.


During the year ended December 31, 2009, the Company recognized income totaling $11,000 from origination fees.  During the three months ended March 31, 2010, the Company did not recognize income from mortgage activity.


Interest Revenues - Revenues from interest are recorded at the time they are earned, thus the revenues shown are for interest actually received and the accruals for that which is due to the Company except for delinquent accruals over 90 days as discussed under notes receivable above. Interest continues to accrue until a foreclosure process begins.  At that point, no additional interest is accrued for book purposes. Interest revenues for the three months ended March 31, 2010 and the year ended December 31, 2009 were $4,000 and $43,000, respectively and exclude accruals for delinquent notes receivable over 90 days.  Two Rivers accrues interest and penalty interest income at the end of each quarter.


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 statement, 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.
 
Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 18

 
In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 which was issued to express the understanding that the use of a “simplified” method, as discussed in SAB 107 in developing an estimate of expected term of “plain vanilla” share options in accordance with ASC 718 would be acceptable beyond December 31, 2007.  The Company adopted this standard beginning January 2008.


Income Taxes


Provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carry forwards.  The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period.  Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustment to the tax provision or benefit in the period of enactment.


Net Income (Loss) per Share


Basic net income per share is computed by dividing net income 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 3,631,510 options and 2,815,000 warrants at December 31, 2009, has not been included in the determination of diluted earnings per share since, under ASC 260, they would be anti-dilutive.  As of March 31, 2010, the Company had converted 1,905,948 options to restrictive stock units (“RSU”).  The conversion and the remaining options and warrants as of March 31, 2010 have not been included in the determination of diluted earnings per share since they would be anti-dilutive.


Comprehensive Income (Loss)


Comprehensive income (loss) includes net income or loss and changes in equity from the market price variations in securities held by the Company.


Recently issued Accounting Pronouncements


On December 23, 2009, the FASB issued ASU 2009-16 to amend U.S. GAAP to incorporate the guidance from ASC 860, Accounting for Transfers of Financial Assets – an Amendment of FASB Statement No. 140.  ASU 2009-16 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 is effective for the Company’s fiscal year beginning January 1, 2010.  The Company is currently evaluating the impact of the future adoption of Update 2009-16.


On December 23, 2009, the FASB issued ASU 2009-17 to amend U.S. GAAP to incorporate the guidance from ASC 810, Amendments to FASB Interpretation No. 46R.  ASC 810 is a revision to FASB Interpretation No. 46R(ASC 810), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The objective of ASC 810 is to amend certain requirements of FIN 46®, to improve financial reporting by enterprises involved with VIEs and to provide more relevant and reliable information to users of financial statements.  ASU 2009-17 is effective for the Company’s fiscal year beginning January 1, 2010.  The Company has adopted this guidance in accounting for its 50% ownership in HCIC for the year ended December 31, 2009.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 19

 
There were various other accounting standards and interpretations issued in 2009 and 2008, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.




NOTE 3 – INVESTMENTS


In December 2007, Northsight purchased a three-unit property in Boston, Massachusetts, known as Thomas Park. The objective is to rehabilitate the property and then sell it.  During the quarter ending June 30, 2008, this property was transferred to Southie.  As of March 31, 2010, the Company and subsidiaries had invested $3,035,000 in the property.  Part of this investment is funded by a $1,200,000 line of credit from Mt. Washington Cooperative Bank, of which $950,000 was payable on this line as of December 31, 2009.   At the end of 2009, the Company performed an analysis of the fair market value of the Thomas Park and reduced the market price by a 6% cost of sale and $250,000 estimated to complete the project and determined an allowance/impairment of $397,000 was necessary.  For the three months ending March 31, 2010 the Company recognized an additional impairment of $66,000.


The Company also has acquired real estate through foreclosure or deed in lieu of foreclosure from its activity in granting short term mortgage financing.  At March 31, 2010, the valuation of these real estate owned properties is $799,000 less an impairment allowance of $166,000 and accumulated depreciation on the rental properties of $24,000, for a net balance of $609,000.


Land and water shares


Upon purchasing water shares and land, the value is recorded at purchase price.  Management evaluates the carrying value, and if the carrying value is in excess of fair market, will establish an impairment allowance to reflect current fair market value.  Currently, there are no impairments on the land and water shares.  No amortization or depreciation is taken on the water shares and land, respectively.


Options on real estate


Under the terms of the HCIC joint venture, the non-related party owning 50% of HCIC, TRB, contributed options on purchasing the Mutual Ditch Company along with purchase agreements for acquiring land.  TRB also contributed cash being held in escrow or that had been paid to owners of the shares of the Mutual Ditch Company.  The Company initially valued TRB’s contribution to HCIC at $2,850,000 and as of March 31, 2010, the value was $2,632,000 due to TRB’s share of HCIC’s losses.


Dam construction


The Company has commenced engineering for the reconstruction of the dam owned by the Mutual Ditch Company.  These costs are capitalized, added to the cost of the dam, and not amortized or depreciated until the dam reconstruction is completed in accordance with ASC 360 and 835.




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 20





NOTE 4 – NOTES RECEIVABLE


Notes Receivable – General


During the year ended December 31, 2007, the Company entered a transaction with a former officer of the Company, Mr. Robert Grizzle.  In exchange for Mr. Grizzle’s shares in the Company, on May 3, 2007, Mr. Grizzle executed a note payable to the Company in the amount of $450,000. The note carries an 8% interest rate and is collateralized by 1,000,000 Aegis USA common shares, 1,500,000 Aegis USA preferred shares, 220,000 shares of the Company’s common stock and 200,000 options to purchase shares of the Company’s common stock at $0.05 per share held by Mr. Grizzle.  The note is a limited recourse note whereby Mr. Grizzle is personally responsible for one half the original principal and interest.  The balance owed is collateralized by Mr. Grizzle’s Aegis common and preferred shares and the Company’s common stock.  Further, the note provides that at the earlier of one year from the date that the common stock of the Company is publicly traded and his shares are registered for resale under an effective registration statement filed by the Company or December 31, 2009.  On September 30, 2007, Mr. Grizzle resigned as the Chief Operating Officer and the Chief Financial Officer of the Company.  On October 17, 2008, the Company filed with the SEC an S-8 registration statement registering Mr. Grizzle’s shares.


During 2009, Mr. Grizzle paid $155,000 against principal plus all accrued interest through November 24, 2009.  During the three months ended March 31, 2010, in order for the Company to receive a $215,000 loan from a private party, the Company’s Board authorized the assignment of the Company’s collateral in the Grizzle note to the lender.  Further, the Board authorized the full release of the note receivable from Grizzle.  The Company recognized the fair value of the note receivable released as an additional cost of land and water shares for the three months ending March 31, 2010.


Mortgages Receivable


In July 2007, Northsight began making short term loans to purchasers of residential properties who purchase their property as part of or after the repossession in a foreclosure proceeding.  As of December 31, 2008, Two Rivers had $2,197,000 in such loans (net of allowance of $476,000 and unearned income of $6,000).  The loans are made primarily to good credit borrowers and are collateralized by a first mortgage on the purchased properties.  The average numbers of days outstanding for the loans are less than 90 days, and the primary takeout on the loans is long term financing through secondary sources such as the Federal National Mortgage Association.


In June 2008, the Company transferred the ownership of the short term loans from Northsight, Inc. to the Company.  Due to this transfer, the Company funds and owns the loans.  There is no longer an intercompany transfer of funds for mortgage loans.  As of December 31, 2009, Two Rivers had $232,000 (net of allowance of $139,000) in such loans.  As of March 31, 2010, $253,000 represented by one loan, was past 90 days due.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 21





Summary of Receivables


Note From
Due
 
Principal Amount
   
3/31/10 Balance
 
Annual Interest rate
 
Accrued Interest
 
Collateral
Short term home mortgages
Various and on-going
  $ 371,000     $ 371,000  
9.95% to 14%
  $ -  
First mortgage
Less: Impairments
              (139,000 )            
Net Balance
            $ 232,000              






NOTE 5 – NOTES PAYABLE


In May 2008, Northsight arranged for a construction line of credit for $1,200,000, due November 2009.  Proceeds from this line were used strictly for the renovation of the Thomas Park property in Boston with the intent to resale.  As of December 31, 2008, the balance outstanding was $1,141,000.  (See also Note 4.)  Since the loan inception, the Company has capitalized $54,000 in interest costs during the construction stage and has expensed $87,000 in interest. This construction line was due November 19, 2009 with interest only payments at prime +2%, with a floor at 7%.  The note was extended to June 1, 2010 with the same interest rate.  For the extension, the bank required cash to be set aside to cover interest payment through June 1, 2010.  This restricted cash account was established January 2010 with a balance of $46,000.  The line contains general covenants which management believes are in full compliance.  This note is collateralized by a first security interest in Thomas Park and the personal signature of John McKowen, CEO.  The Company is in the process of working with Mt. Washington Cooperative Bank on another extension past June 1, 2010.


Beginning on September 17, 2009, HCIC began acquiring shares in the Mutual Ditch Company and related land from a Mutual Ditch Company shareholder.  As part of these acquisitions, many sellers took back notes payable by HCIC to the seller.  As of December 31, 2009 these loans totaled $2,175,000. As of March 31, 2010 these loans totaled $6,831,000.   The notes carry interest at 6% per annum, interest payable monthly, the principal due September 1, 2012 through March 31, 2013, and are collateralized by the Mutual Ditch Company shares and land.


Of the $6,831,000 in seller carry back notes, $864,000 provides the holders the right to convert some or all of the amounts owing into the Company’s stock at $1/share.  The holder can convert anytime until the note is paid.  In the future, if the market value of the Company’s stock is in excess of $1.00/share, there will be an additional expense recognized due to the conversion feature. These notes are due March 31, 2013 with 6% annual interest, with the interest paid monthly.




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 22





NOTE 6 – INFORMATION ON BUSINESS SEGMENTS
 
We organize our business segments based on the nature of the products and services offered. We primarily focus on the Water Business with Two Rivers Water Company as the parent company and TRWC and HCIC Holdings JV as subsidiaries.  Two Rivers Water Company also holds our legacy assets that include the mortgage notes receivable, the property acquired through foreclosure or deed in lieu of foreclosure on previous mortgage notes held by the Company.  Other existing and prior real estate activity is held in Northsight and Northsight’s subsidiaries, Southie and Legendary.  Southie was a wholly owned subsidiary of Two Rivers until the Company’s board approved the transfer of Southie as a 100% owned subsidiary of Northsight effective January 1, 2010.
 
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 Two Rivers Water Company.




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 23



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




 
For the three months ended March 31, 2010
 
 
(In thousands)
 
   
Two Rivers Water Co.
   
North-sight, Inc.
   
Southie, LLC
   
Legendary Investment Group, LLC
   
TRWC
   
HCIC Holdings JV
   
Two Rivers Farms
   
Two Rivers Energy
   
Mutual Ditch Company
 
Revenue
                                                     
Loan fees, interest and other
  $ 4                   30       -       -       -       -       18  
Cost of Services
    -                   (27 )     -       -       -       -       -  
Gross Profit
    4                   3       -       -       -       -       18  
                                                                     
Total Operating Expenses
    528                   19       29       28       -       15       123  
                                                                     
Total Other Income/(Expense)
    (10 )                 -       -       (58 )     -       -       -  
Net (Loss) Income from continuing operations before income taxes
    (534 )                 (16 )     (29 )     (86 )     -       (15 )     (105 )
Income Taxes (Expense)/Credit
    -                   -       -       -       -       -       -  
                                                                     
Net Income (Loss) from continuing operations
    (534 )                 (16 )     (29 )     (86 )     -       (15 )     (105 )
                                                                     
Discontinued operations:
                                                                   
Loss from operations of discontinued real estate and mortgage business
    -       (8 )     (142 )     -       -       -       -       -       -  
Income tax benefit
    -                       -       -       -       -       -       -  
Loss on discontinued operations
    -       (8 )     (142 )     -       -       -       -       -       -  
                                                                         
Non-controlling interest
                                            43       -       -       31  
                                                                         
Net (Loss) Income
  $ (534 )     (8 )     (142 )     (16 )     (29 )     (43 )     -       (15 )     (74 )
                                                                         
Segment assets
  $ 1,198       129       2,742       38       6       12,389       22       -       357  




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 24



   
For the three months ended March 31, 2009
 
   
(In thousands)
 
   
Two Rivers Water Co
   
Northsight, Inc.
   
Southie, LLC
   
Legendary Investment Group, LLC
 
Revenue
                       
Loan fees, interest and other
  $ 35       -       -       11  
Cost of Services
    -       -       -       (7 )
Gross Profit
    35       -       -       4  
                                 
Total Operating Expenses
    93       -       -       25  
                                 
Total Other Income/(Expense)
    50       -       -       -  
Net (Loss) Income from continuing operations before income taxes
    (8 )     -       -       (21 )
Income Taxes (Expense)/Credit
    (7 )     -       -       7  
                                 
Net Income (Loss) from continuing operations
    (15 )     -       -       (14 )
                                 
Discontinued operations:
                               
Loss from operations of discontinued real estate and mortgage business
    -       (81 )     (541 )        
Income tax benefit
    -       28       34          
Loss on discontinued operations
    -       (53 )     (507 )     -  
                                 
Non-controlling interest
    -       -       -       -  
                                 
Net (Loss) Income
  $ (15 )     (53 )     (507 )     (14 )
                                 
Segment assets
  $ 1,951       146       6,069       18  


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 25





NOTE 7 - EQUITY TRANSACTIONS


Common Stock


During the year ended December 31, 2009, the Company issued 150,000 shares at $1.00 per share through a private placement and 200,000 shares through the exercise of 200,000 options at $0.05 per share.


During the year ended December 31, 2009, the Company recognized stock-based compensation expense of $118,000, recovered BPZ stock valued at $143,000 and purchased 154,474 shares of the Company’s stock on the open market for $93,000.  These shares were retired except for 20,000 shares that are still pending retirement.


During the three months ended March 31, 2010 the Company’s Board authorized a private placement of up to 5,000,000 shares at $1.00 per share to accredited investors.   As of March 31, 2010 the Company had accepted subscriptions representing 1,335,000 shares for gross proceeds of $1,335,000.
During the three months ended March 31, 2010 the Company purchased land and water shares in the Mutual Ditch Company with cash and the issuance of 500,000 shares valued at $1.00 per share.


Stock Options and Restrictive Stock Units (RSUs)


The Company has a Stock Incentive Plan (the "Incentive Plan"), that allows the Company to grant incentive stock options and/or purchase rights (collectively "Rights") to officers, employees, former employees and consultants of the Company and its subsidiaries.  The board has given the ability to grant Rights to the CEO.


A summary of the Two Rivers option plan is as follows:
 
   
Shares
   
Weighted Average
Exercise Price
 
Outstanding,  January 1, 2009
    3,941,510     $ 1.33  
Granted
    -       -  
Cancelled
    (110,000 )   $ 2.00  
Expired
    -       -  
Exercised
    (200,000 )   $ 0.05  
Outstanding, January 1, 2010
    3,631,510     $ 1.38  
Granted
    -       -  
Cancelled
    (1,905,948 )   $ 1.41  
Expired
    -       -  
Exercised
    -       -  
Outstanding, March 31, 2010
    1,725,562     $ 1.36  
Options Exercisable , March 31, 2010
    1,725,562     $ 1.36  




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 26





A summary of the Northsight option plan is as follows:


   
Shares
   
Weighted Average
Exercise Price
 
Outstanding, January 1, 2009
    582,777     $ 0.50  
Granted
    -       -  
Cancelled
    (562,777 )   $ 0.50  
Expired
    -       -  
Exercised
    -       -  
Outstanding,  January 1, 2010
    20,000     $ 0.50  
Granted
    -       -  
Cancelled
    -       -  
Expired
    -       -  
Exercised
    -       -  
Outstanding, March 31, 2010
    20,000     $ 0.50  
Options Exercisable , March 31, 2010
    6,667     $ 0.50  


If all of the Northsight options outstanding at March 31, 2010 were exercised, the impact on the minority interest would be immaterial.


During the three months ended March 31, 2010, the Company converted 1,905,948 of its stock options to RSUs.  Under ASC 718, a computation was made to perform a fair value of the options and the fair value of the RSUs.  The expense recognized for the three months ended March 31, 2010 is $134,000.  The remaining unamortized amount is $1,202,000.


Further, during the three months ended March 31, 2010, an additional 2,200,000 RSUs were granted to the Company’s key employees.  The fair value of this award is $1,980,000 (assuming an estimated forfeiture of 10%) which is recognized over three years.  For the three months ended March 31, 2010, this expense was $83,000.


The Black-Scholes model of fair value was used using the following variables:


Expected stock price volatility
35%
Risk-free interest rate
2.64%
Expected option life (years)
3.3 to 5.2
Expected annual dividend yield
0%




In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) 110 which was issued to express the understanding that the use of a “simplified” method, as discussed in SAB 107 in developing an estimate of expected term of “plain vanilla” share options in accordance with ASC 718 would be acceptable beyond December 31, 2007. The Company adopted this standard beginning January 2008, and it did not have a material impact on the Company’s consolidated financial statements.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 27





The fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model that uses the assumptions noted in the table below. Because this option valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed above. The Company utilizes historical volatility of other entities in a similar line of business for a period commensurate with the contractual term of the underlying financial instruments and used weekly intervals for price observations. The Company will continue to consider the volatilities of those entities unless circumstances change such that the identified entities are no longer similar to the Company or until there is sufficient information available to utilize the Company’s own stock volatility. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.


Warrants


At the Company’s Board meeting held on February 26, 2010, the Board authorized to extend its existing warrants from a May and July, 2010 expiration date to an expiration date of December 31, 2010.
 
The following warrants to purchase common stock are outstanding:
 
Number of common
shares covered by warrants
   
Exercise Price
 
Expiration Date
  1,332,500     $ 4.00  
December 31, 2010
  1,332,500       2.00  
December 31, 2010
  150,000       1.00  
December 31, 2010
  2,815,000            


Due to the extension of the warrant expiration date, a new fair value calculation was performed using the Black-Scholes method using the following variables:


Expected stock price volatility
35%
Risk-free interest rate
2.64%
Expected option life (years)
3.3 to 5.2
Expected annual dividend yield
0%




Based on this calculation, an expense of $50,000 was recognized for the three months ended March 31, 2010.


 
NOTE 8 – INCOME TAXES
 
At December 31, 2009, the Company estimated a total 2009 income tax benefit and related expected refund of $489,000.
 
During the three months ended March 31, 2010, the Company evaluated its potential tax benefit from the loss recognized for this period.   The tax benefit is as follows:


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 28



 
Statutory Rate Reconciliation
Federal Rate
    34.00 %
State Rate
    4.63 %
Federal benefit of State Rate
    (1.57 )%
Net Effective Rate
    37.06 %
 
Tax asset recognition (in thousands):
Loss reported on financials before taxes
  $ (868 )
Tax adjustments:
       
Non-deductible impairment expense
    14  
Stock option expense
    267  
Entertainment and other items
    8  
Adjusted taxable loss
    (579 )
Net Effective Rate
    37.06 %
Tax benefit from loss carryback
  $ (215 )
         
Refund expected as of December 31, 2009
  $ 489  
Refunds received
    (61 )
Deferred tax asset carried forward from 2009
    277  
Additional benefit from loss carryback above
    215  
Deferred tax asset valuation allowance
    (492 )
Tax receivable as of March 31, 2010
  $ 428  


Total current deferred tax asset of $215,000 is not recognized in current operations, since management has determined the tax benefit cannot be reasonably assured of being used in the near future.  Total deferred tax asset as of March 31, 2010 is $492,000.




NOTE 9 – DISCONTINUED OPERATIONS


During the year ended December 31, 2009, the Company decided to shift its focus from the short term residential mortgage banking and ownership of residential rental property to the Water Project.  In order to assist in the funding of the Water Project, the Company began an orderly liquidation of its mortgage and real estate assets.  It is expected that this liquidation will be completed by December 31, 2010.


The assets to be liquidated are presented at the lower of cost or current market values, as of March 31, 2010 and December 31, 2009 and are detailed as follows:


(in thousands)
 
Mar 31, 2010
   
Dec 31, 2009
 
Mortgages receivable
  $ 371       371  
Thomas Park project
    3,035       2,962  
Other real estate owned
    799       1,529  
Subtotal
    4,205       4,862  
Less allowances and depreciation
    (1,284 )     (1,381 )
Net book value of property to sell
    2,921       3,481  
Less amounts owed on real estate to be sold
    (950 )     (950 )
Net projected proceeds from mortgage receivables, Thomas Park, and other real estate owned
  $ 1,971       2,531  
 


 
Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 29

 
Within the discontinued operations, during the three months ended March 31, 2010 and 2009, the Company recognized a gain on disposal of real estate of $8,000 and $-0-, respectively.


Within the discontinued operations, during the three months ended March 31, 2010 and 2009, the Company had $24,000 and $111,000 in revenue, respectively.


Because it is Management’s estimate that the above assets to be sold are stated at current fair market value, when these assets are sold it is projected not to be a further gain or loss.  However, market conditions can change which would then cause a gain or loss to be recognized upon sale.


These assets are held in the Company’s subsidiaries Northsight and Southie.




NOTE 10 - COMMITMENTS AND CONTINGENCIES


Operating Leases


In August 2005, the Company along with its subsidiary, Northsight entered into an office lease for the Phoenix operations for a monthly payment of $6,697, plus pass throughs, per month.  The lease expired July 31, 2010.  In July 2009, the Company negotiated an early termination of this lease for a onetime payment of $25,000.


In February 2008, the Company along with its subsidiary, Northsight opened offices at 2000 S. Colorado Blvd, Suite 200, Denver, Colorado.  The lease for this office is $4,701 per month, plus pass throughs.  The lease expires February 28, 2011.


In July, 2009, Legendary signed a 36 month office lease that averages $1,000 per month.


The amounts due at the base rate are as follows:


Period
 
Amount Due
 
2010
  $ 51,000  
2011
  $ 19,000  
2012
  $ 7,000  


The Company also has equipment and software leases with the following commitments:


Period
 
Amount Due
 
2010
  $ 5,000  
2011
  $ 5,000  




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 30





Bank Accounts


As of May 19, 2008, Southie acquired a $1,200,000 construction loan with Mt. Washington Cooperative Bank for the development of the Thomas Park Property. The loan is due on June 1, 2010 with monthly interest only payments, at prime plus 2% interest rate and an interest rate floor of 7%.  As of December 31, 2009 and March 31, 2010, the balance owed on the loan was $950,000.   Previously this loan was due on November 19, 2009 but was extended to June 1, 2010.  As part of the agreement to extend the loan a principal reduction was due and an establishment of a restricted cash account to cover interest payments until June 1, 2010.   The restricted cash account was not established until January 12, 2010 and totaled $46,000.  As of March 31, 2010, $29,000 was in the restricted cash account.


HCIC Holdings, LLC – Joint Venture


On August 17, 2009, Two Rivers, through its wholly owned subsidiary TRWC, and TRB formed HCIC, a joint venture.  Under the terms of the joint venture agreements, the Company, at the Company’s sole discretion, can contribute up to $2,850,000 in cash. As of December 31, 2009 the Company had contributed $1,807,000 in HCIC.  At May 6, 2010, the Company has contributed $3,670,000 to HCIC and the related Water Project.  As of March 31, 2010 the Company has contributed $637,000 over its $2,850,000 capital contribution.  The capital contribution was eliminated in the consolidation with HCIC.




Defined Contribution Plan


Two Rivers has a 401(k) profit sharing plan (the “Plan").  Subject to limitations, eligible employees may make voluntary contributions to the Plan. The Company may, at its discretion, make additional contributions to the Plan.  The Company did not contribute during the three months ended March 31, 2010.




NOTE 11 – RELATED PARTY TRANSACTIONS


In August 2009, the Company signed a one year lease for office space to be used by Two Rivers Water Company in Walsenburg Colorado.  The rate is $600 per month.  The building is owned by an officer of a subsidiary of the Company.  Management believes that this rent payment approximates the fair market value.


On August 18, 2009, the Company loaned $110,118 to an individual who was subsequently appointed as an officer of a subsidiary of the Company.  The note was secured by cattle and 200,000 shares of the Company’s common stock.   On August 24, 2009, the Company loaned an additional $11,840 to the same officer using the same collateral being held against the August 18, 2009 note.   The notes were due in six months and had an annual interest rate of 5%. On August 19, 2009, the individual who the Company loaned money was appointed an officer of one of the Company’s subsidiaries. Due to the limitations of having an officer borrow funds from the Company where that person is an officer, the Company requested repayment of the notes from the officer, which were paid in full with interest on November 10, 2009. On November 10, 2009, the Company purchased 320 acres from the officer for $260,000.  The Company deems this purchase strategic to its expansion in the water business.  An independent appraisal valued the land at $310,000.






Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 31



NOTE 12 – LEGAL PROCEEDINGS


Carson Suit


The Company was a co-defendant in a lawsuit filed on April 2, 2008 in Jackson County Circuit Court in Missouri.   The Company loaned money to Lydia Carson (borrower) to purchase a home in Kansas City Missouri.   The plaintiffs claimed they had a superior lien on the property that was in place before the borrower borrowed money from the Company for the purchase. On March 31, 2010, the amount owed by Lydia Carson to the Company was $253,000 (note balance of $315,000 less escrow held of $62,000).  On April 27, 2010 the Company received a judgment granting the Company a first lien position which the Company is in the process of foreclosing on the lien.


Morrow Suit


The Company was notified in September, 2009 that it was named as a defendant in a lawsuit that alleges either the Company or another third party bank did not have a proper promissory note and deed of trust against a short-term mortgage loan made to a borrower in April, 2008 (“Morrow” loan and suit).   After the Morrow loan was made by the Company, the note was improperly transferred to Jaguar.  When the improper transfer was discovered by the Company, the Company requested Jaguar to return all documents to the Company or fund the loan.  On August 4, 2008, Jaguar re-assigned the note and deed of trust back to the Company.  However, Jaguar never returned to the Company the original lending file and documentation.  During the period of time that Jaguar was in possession of the Morrow file, the lawsuit alleges that Jaguar used the Morrow note and deed of trust to obtain money from another third-party bank.


Morrow sold the property representing the security interest via the deed of trust in the note in February 2009.   Closing occurred through a title company with title insurance issued.  At the closing, the Company received $77,000 as payoff on the Morrow note.  Therefore, the other third party bank did not receive any proceeds.   Presently the third party bank is suing the current owner of the property that Morrow sold for payment on the note.  The property owner has filed a complaint in State of Colorado, Adam County District Court naming Northsight and the third party bank as defendants.  The plaintiff seeks either Northsight to pay the third party bank or for the third party bank to release its claim to the property.  If Northsight is not successful in its defense, then its exposure is $77,000 plus potential fees and interest.


The Company believes it properly received the proceeds and is being represented by legal counsel to defend its position.  A contingency exists with respect to this matter, the ultimate resolution of which cannot be presently determined.




NOTE 13 – SUBSEQUENT EVENTS


This section includes all subsequent events through the date the financial statements were available to be issued.


Subsequent to March 31, 2010 and through May 7, 2010, the Company has received an additional $240,000 in its current private placement, representing 240,000 common stock shares to be issued.


At the Company’s Board Meeting held on April 22, 2010, the Company awarded 500,000 RSUs to two members of TRB (for a total of 1,000,000 RSUs) contingent on the TRB holder’s transfer of their interest in TRB to the Company.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 32







Note about Forward-Looking Statements


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




Plan of Operations - Overview


During 2009, Two Rivers focused its business development activities on winding down its real estate activities through its subsidiaries Northsight and Southie.  With funds generated from the liquidation of real estate promissory notes receivable and selling residential real estate, Two Rivers entered into the Water Business beginning in July 2009 and has dedicated the majority of its resources to expanding the Water Business.  There can be no assurances that any of our investments will be successful.


On March 17, 2010, the Company formed Two Rivers Farming, LLC (“Farming”) to acquire and operate agriculture land either as a sole operator or in joint venture with other individuals and companies (the “Farming Business”).  Two Rivers is Farming’s sole member and owner.  Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farming, LLC.


On March 17, 2010, the Company formed Two Rivers Energy, LLC (“Energy”), a Colorado limited Liability Company, to produce alternative energy on land owned by the Company, or the Company’s subsidiaries.  Two Rivers is Energy’s sole member and owner.  The development of alternative energy equipment and the subsequent production of alternative energy will mostly be from solar and might be operated through a joint venture with one or more other entities, not yet determined (the “Energy Business”).  Two Rivers intends to hold whatever ownership interest it has in the Energy Business within Two Rivers Energy, LLC.


The Thomas Park project in South Boston (with an anticipated additional expenditure of $250,000) is ready for sale and is listed for a gross selling price of $2,567,000.  We have received an offer on one of the three units.  We are working with our realtor and our legal counsel in Boston to enter into a purchase and sale agreement.  As of March 31, 2010 we have invested $3,035,000 in Thomas Park, less an impairment of $995,000, for a carrying value of $2,080,000.


As of March 31, 2010, we have $609,000 in real estate owned (net, after an impairment of $166,000 and depreciation of $24,000).  It is management’s intent to liquidate all of this property during 2010.  During this liquidation, we do not anticipate any additional material expenses to be incurred.   If the property is held in Southie, proceeds from liquidation will be transferred to Two Rivers as a reduction of the intercompany debt that Southie and Northsight owe to the parent company.  Management expects to have the liquidation of real estate owned and mortgage notes receivable held completed by December 31, 2010.


Two Rivers Water Company Amended 10Q March 31, 2010
 
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To augment our efforts on the development of the Water Business and other related businesses we are in the process of completing the purchase of the remaining outstanding shares that we do not own of the Mutual Ditch Company and additional land which would assist in perfecting water rights and provide additional water resources.  As of March 31, 2010 HCIC had a 71% ownership in the Mutual Ditch Company.  As of April 30, 2010, HCIC owned 74% of the Mutual Ditch Company.


In order to assist with additional capital formation, our Board approved a private placement effective January 5, 2010 to offer the Company’s restricted common stock at $1.00/share.  The maximum offering is 5,000,000 shares, no minimum, and the offering expires February 28, 2010, and subsequently extended by the Board to April 30, 2010 with the intent to extend the expiration date again.  As of March 31, 2010 and May 7, 2010, 1,335,000 and 1,575,000 cumulative subscriptions have been received, respectively.  There can be no assurances that the Company will be able to raise funds under its current private placement.




Results of Operations
For the Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009


During the three months ended March 31, 2010, we recognized revenues from continuing operations of $52,000, compared to $46,000 in revenues from continuing operations during the three months ended March 31, 2009.   Within our discontinued operations, during the three months ended March 31, 2010 and 2009 we recognized revenues of $24,000 compared to $111,000, respectively.  The decrease of $87,000 in our discontinued operations is a result of our company’s new focus on the Water, Farming and Energy Business and the liquidation of our legacy mortgage and real estate business.


The direct cost of delivering our continuing operations for the three months ended March 31, 2010 and 2009 were $27,000 and $7,000, respectively.  This increase is due to the expansion of our residential property management and brokerage business in the Phoenix area.  In terms of our discontinued operations, the direct cost of delivering the discontinued operations were $49,000 and $65,000, for the three months ended March 31, 2010 and 2009, respectively. The decrease of $16,000 is due to our winding down of the discontinued operations.


Operating expenses from continuing operations during the three months ended March 31, 2010 and 2009 were $741,000 and $120,000, respectively.  The increase of $621,000 is due to the non-cash expense of granting of restrictive stock units and extending warrants expiration dates ($267,000) and increase expenses as we expand our business focus in water, farming and energy.


Operating expenses from discontinued operations during the three months ended March 31, 2010 and 2009 were $42,000 and $201,000, respectively.  This reflects our new business focus and winding down of our discontinued operations.  For discontinued operations, we recognized an after tax benefit loss of $84,000 and $560,000 for the three months ended March 31, 2010 and 2009, respectively.


For continuing operations, during  the three months  ended  March  31,  2010 and 2009,  we  recognized  a net  loss  $784,000 and $29,000, respectively.  The increased loss of $755,000 is due from our rapid expansion of the Water, Farming and Energy Business.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 34





LIQUIDITY


From the Company’s inception through March 31, 2010, we have funded our operations primarily from the following sources:
-  
Equity proceeds through private placements of Two Rivers securities;
-  
Revenue generated from operations;
-  
Loans and lines of credit;
-  
Sales of residential properties acquired through deed-in-lieu actions;
-  
Sales of equity investments, and
-  
Proceeds from the exercise of legacy Navidec, Inc. Options


Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital.  As of March 31, 2010, the Company had cash and cash equivalents of $713,000.  Cash flow consumed by our operating activities totaled $655,000 for the three months ended March 31, 2009 compared to operating activities providing $54,000 for the three months ended March 31, 2009.


As of March 31, 2010, the Company had $1,408,000 in current assets and $1,301,000 in current liabilities.  The Company intends to continue with its strategy of liquidating its real estate assets to expand their Water, Farming and Energy Business and on its current private placement of its restricted common shares in order to provide additional capital to be used in the support of its operations.


Cash flows used by our investing activities for the three months ended March 31, 2010 were $5,239,000 compared to $203,000 for the three months ended March 31, 2009.  The increase is primarily due to our purchase of the shares in the Mutual Ditch Company.


For the three months ended March 31, 2009 we used $203,000 from investing activities.  We invested $216,000 in real estate in Boston, Massachusetts (Thomas Park), and received $136,000 from a sale of one REO property.  Through our marketable securities trading efforts, we purchased $37,539,000 in marketable securities and sold $37,416,000 in marketable securities.


Net cash produced in financing activities was $5,991,000 for the three months ended March 31, 2009 compared to a use of cash of $68,000 for the three months ended March 31, 2009.  During the three months ended March 31, 2010 we increased our long-term borrowings by $4,656,000 through owner financing of the water and land purchase for the Water Business, and sold $1,335,000 for cash in the Company’s common stock in a private placement.


Subsequent to March 31, 2010 and through May 7, 2010, the Company has sold $240,000 in its current private placement, representing 240,000 common stock shares to be issued.  The Board also approved the issuance of an additional 500,000 shares valued at $1.00 per share for the purchase of water shares and associated land.


For the three months ended March 31, 2009 from financing activities we used $68,000 in cash to purchase back our common stock, which was retired.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 35





CRITICAL ACCOUNTING POLICIES


Two Rivers has identified the policies below as critical to Two Rivers’ business operations and the understanding of Two Rivers results from operations.  The impact and any associated risks related to these policies on the Company’s business operations is discussed throughout Management’s Discussion and Analysis of Financial Conditions and Results of Operations where such policies affect Two Rivers reported and expected financial results.  For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements beginning on page [INSERT PAGE NUMBER] of this document.  Note that the Company’s preparation of this document requires Two Rivers to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of Two Rivers’ 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.


RESTATEMENT OF RESULTS


Subsequent to the issuance of both the Company's audited financial statements for the year ended December 31, 2009 and its unaudited financial statements for the quarterly periods ended March31, 2010 June 30, 2010 and to the issuance of a professional valuation of the Mutual Ditch Company issued October 29, 2010, , the Company deemed that it was necessary to restate its financial statements for the quarters ended March 31, 2010 and June 30, 2010 as contained in its Quarterly Reports on Form 10Q, filed May 14, 2010 and August 16, 2010, respectively.


Beginning with the quarter ending September 30, 2009, the Company consolidated the financial results of HCIC.  As of December 31, 2009, HCIC owned 18% of the Mutual Ditch Company.  During the quarter ended March 31, 2010, HCIC purchased additional shares of the Mutual Ditch Company and owned 71% of the Mutual Ditch Company shares.   For the quarters ended March 31, 2010 and June 30, 2010, the Company estimated the value of the Mutual Ditch Company to be equal to the valuation of the price paid for shares in the Mutual Ditch Company plus the valuation of the options contributed by TRB.  The Company consolidated HCIC and the Mutual Ditch Company based on this valuation, pending a formal appraisal. (See Principles of Consolidation.)


On October 29, 2010, the Company received a professional valuation of the Mutual Ditch Company.  The valuation of the Mutual Ditch Company as of March 2, 2010 is estimated to be $24,196,000.   Therefore, the valuation of the asset “Water Shares (HCIC)” along with a reduction of the “Options on real estate” was restated to reflect this new valuation.  The corresponding offset increased the valuation of the non-controlling interest to its fair value.


In accordance with ASC 820 Fair Value Measurements and Disclosures  The ASC establishes a framework for measuring fair value, establishes a fair value hierarchy based on inputs used to measure fair value, and expands disclosure about fair value measurements. Adopting this statement has not had an effect on the Company’s financial condition, cash flows, or results of operations.


In accordance with ASC 820, the financial instruments have been categorized, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels, as follows:


Level 1.  Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g. U.S. Government securities and active exchange traded equity securities.


Level 2.  Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g. certain corporate and municipal bonds and certain preferred stocks).  This includes (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.


Two Rivers Water Company Amended 10Q March 31, 2010
 
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Level 3.  Inputs that are unobservable.  Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instruments (e.g. certain structured securities and privately held investments).


The professional appraisal of the Mutual Ditch Company used Level 2 inputs whereby the water rights were valued using comparable prices in markets that are not active.  The infrastructure of the Mutual Ditch Company, including water storage, ditches and diversion points, was valued at replacement cost less physical obsolescence and deterioration.  The increase in the value of the asset did not have any effect on the Company’s unaudited statement of operations for the three months ended March 31, 2010.


   
March 31, 2010
 
               
Restated
 
ASSETS:
 
Unaudited
   
Adjustments
   
Unaudited
 
Current Assets:
                 
Cash and cash equivalents
  $ 713            $ 713  
Restricted cash
                  -  
Advances and accounts receivable
    56             56  
Income taxes receivable
    428             428  
Deposits and prepaid expenses
    211             211  
Total Current Assets
    1,408             1,408  
                       
  Property, equipment and software, net (Note 2)
    119             119  
                       
Other Assets
                     
Mortgages receivable - Net of allowance for bad debts
    232             232  
Investment in Boston Property, net of impairment
    2,080             2,080  
Land
    1,324             1,324  
Water shares (HCIC)
    8,175       16,021       24,196  
Options on real estate
    2,647       (2,647 )     -  
Dam Construction
    265               265  
Other real estate owned - net of impairment and accumulated depreciation
    609               609  
Farm product
    22               22  
Other assets
    -               -  
Total Other Assets
    15,354               28,728  
TOTAL ASSETS
  $ 16,881       13,374      $ 30,255  


Two Rivers Water Company Amended 10Q March 31, 2010
 
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LIABILITIES & STOCKHOLDERS' EQUITY:
             
Current Liabilities:
             
Accounts payable
  $ 284        $ 284  
Short term borrowings
    950         950  
Accrued liabilities
    67         67  
Total Current Liabilities
    1,301         1,301  
                   
Notes Payable - Long Term
    6,831         6,831  
Total Liabilities
    8,132         8,132  
                   
Stockholders' Equity:
                 
Common stock
    11         11  
Additional paid-in capital
    11,188  
 
    11188  
Accumulated (deficit)
    (4,981 )       (4,981 )
Total Two Rivers Water Company Shareholders' Equity
    6,218         6,590  
Noncontrolling interest in subsidiaries
    2,531  
        13,374
    15,905  
        Total Stockholders' Equity
    8,749         22,123  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 16,881  
        13,374
   $ 30,255  


REVENUE RECOGNITION


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


ALLOWANCE FOR BAD DEBT


Two Rivers’ policy on allowances for bad debt determines the timing and recognition of expenses.  The Company follows guidelines that establish allowances based off of historical and account specific trends; however, certain judgments affect the application of Two Rivers’ bad debt allowance policy. Two Rivers receivables are recorded net of an allowance for doubtful accounts which requires management to estimate amounts due which may not be collected.  This estimate requires consideration of general economic conditions, overall historical trends related to the Company’s collection of receivables, customer specific payment history, and customer specific factors affecting their ability to pay amounts due.  Management routinely assesses and revises its estimate of the allowance for doubtful accounts.  As of March 31, 2010 and December 31, 2009, we had $1,218,000 and $1,390,000, respectively, in allowances for bad debt and valuation impairments, as follows:


Allowance for:
 
Mar 31, 2010
   
Dec 31, 2009
 
Short Term Mortgages
  $ 139,000       139,000  
Boston Property – Thomas Park
    955,000       889,000  
Real Estate  owned – depreciation
    24,000       49,000  
Real Estate owned – impairments
    166,000       313,000  
Total
  $ 1,284,000       1,390,000  
 


 
Two Rivers Water Company Amended 10Q March 31, 2010
 
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GOODWILL AND INTANGIBLE ASSETS


During the year ended 2009 and subsequently, the Company has acquired water shares in the Mutual Ditch Company, which is considered an intangible asset.   Currently, the water shares are recorded at purchase price less the Company’s prorata share of the negative net worth in the Mutual Ditch Company.  Management evaluates the carrying value, and if necessary, will establish an impairment of value to reflect current fair market value.  Currently, there are no impairments on the land and water shares.


Under the terms of the HCIC joint venture, the non-related party owning 50% of HCIC, TRB, contributed options on purchasing the Mutual Ditch Company along with purchase agreements for acquiring land.  TRB also contributed cash being held in escrow or that had been paid to owners of the shares of the Mutual Ditch Company.  The Company valued the TRB’s contribution to HCIC at $2,850,000.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Two Rivers is exposed to the impact of interest rate changes and change in the market values of the Company’s investments.  Based on Two Rivers'  market  risk  sensitive instruments  outstanding  as of March 31, 2010,  as described  below,  it has determined  that there was no  material  market risk  exposure to the  Company's consolidated financial position, results of operations, or cash flows as of such date. Two Rivers does not enter into derivatives or other financial instruments for trading or speculative purposes.


INTEREST RATE RISK


At March 31, 2010, the Company’s exposure to market rate risk for changes in interest rates relates primarily to its borrowings, as well as, its mortgage services business.  Two Rivers has not used derivative financial instruments in its credit facilities.  A hypothetical 10% increase in the Prime Rate would not be significant to the Company's financial position, results of operations, or cash flows.


IMPAIRMENT POLICY


At least once every quarter, Two Rivers examines all of their assets for proper valuation and to determine if an allowance for 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 impairment is booked.  However, if Management, based on changes in the market value of the assets, determines the impairment to be over stated, the existing impairment is reduced to reflect management’s new estimate of value.


INVESTMENT RISK


From time to time Two Rivers has made investments in equity instruments in companies for business and strategic purposes.  These investments, when held, are included in other long-term assets and are accounted for under the cost method since ownership is less than 20% and Two Rivers does not assert significant influence.


INFLATION


Two Rivers does not believe that inflation will have a material negative impact on its future operations.




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. Based on our market risk sensitive instruments outstanding as of March 31, 2010, as described below, 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.




Two Rivers Water Company Amended 10Q March 31, 2010
 
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ITEM 4.  CONTROLS AND PROCEDURES


Disclosures Controls and Procedures


We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of 1934,  as  amended  (the  "Exchange  Act")  that are  designed  to ensure  that information  required to be disclosed in our reports  under the Exchange Act, is recorded,  processed,  summarized and reported within the time periods  required under  the  SEC's  rules and forms  and that the  information  is  gathered  and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.


As required by SEC Rule 15d-15(b), Mr. John McKowen, our Chief Executive Officer and Mr. Wayne Harding, our Chief Financial Officer carried out an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period covered by this report


The Company, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2010.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, because of the material weakness in internal control over financial reporting described below, the Company's disclosure controls and procedures were not effective as of March 31, 2010.




ITEM 4T.   CONTROLS AND PROCEDURES


Management's Annual Report on Internal Control Over Financial Reporting.


Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that:


 
 (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;


 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made on in accordance with authorizations of our management and directors; and


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 40

 
(iii)
provide reasonable  assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, 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.


Management’s assessment of the effectiveness of the small business issuer’s internal control over financial reporting as of the quarter ended March 31, 2010, is that we believe that internal control over financial reporting continues not to  be effective, and we in the process of improving controls.  We have identified certain material weaknesses of accounting relating to a shortage of accounting and reporting personnel due to limited financial resources and the size of our Company.  This material weakness can lead to the following:
·  
An inability to ensure there is timely analysis and review of accounting records, spreadsheets, and supporting data; and
·  
an inability to effectively monitor access to, or maintain effective controls over changes to, certain financial application programs and related data.


Considering the nature and extent of our current operations and any risks or errors in financial reporting under current operations and the fact that we have been a small business with limited employees caused a weakness in internal controls involving the areas disclosed above.


In 2008, we hired a full time in-house Certified Public Accountant, who, as of September 2009, became our Chief Financial Officer and have taken the following steps:
·  
we have trained additional staff members to assist in the finance and accounting functions to ensure that there are separation of duties, as much as possible given our limited staff; and
·  
we are in the process of analyzing our processes for all business units and the establishment of formal policies and procedures with necessary segregation of duties, which will establish mitigating controls to compensate for the risk due to lack of segregation of duties.


This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the Company's registered  public  accounting  firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this quarterly report.


There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 41







ITEM 1.    LEGAL PROCEEDINGS


Carson Suit


The Company was a co-defendant in a lawsuit filed on April 2, 2008 in Jackson County Circuit Court in Missouri.   The Company loaned money to Lydia Carson (borrower) to purchase a home in Kansas City Missouri.   The plaintiffs claimed they had a superior lien on the property that was in place before the borrower borrowed money from the Company for the purchase. On March 31, 2010, the amount owed by Lydia Carson to the Company was $253,000 (note balance of $315,000 less escrow held of $62,000).  On April 27, 2010 the Company received a judgment granting the Company a first lien position which the Company is in the process of foreclosing on the lien.


Morrow Suit


The Company was notified in September, 2009 that it was named as a defendant in a lawsuit that alleges either the Company or another third party bank did not have a proper promissory note and deed of trust against a short-term mortgage loan made to a borrower in April, 2008 (“Morrow” loan and suit).   After the Morrow loan was made by the Company, the note was improperly transferred to Jaguar.  When the improper transfer was discovered by the Company, the Company requested Jaguar to return all documents to the Company or fund the loan.  On August 4, 2008, Jaguar re-assigned the note and deed of trust back to the Company.  However, Jaguar never returned to the Company the original lending file and documentation.  During the period of time that Jaguar was in possession of the Morrow file, the lawsuit alleges that Jaguar used the Morrow note and deed of trust to obtain money from another third-party bank.


Morrow sold the property representing the security interest via the deed of trust in the note in February 2009.   Closing occurred through a title company with title insurance issued.  At the closing, the Company received $77,000 as payoff on the Morrow note.  Therefore, the other third party bank did not receive any proceeds.   Presently the third party bank is suing the current owner of the property that Morrow sold for payment on the note.  The property owner has filed a complaint in State of Colorado, Adam County District Court naming Northsight and the third party bank as defendants.  The plaintiff seeks either Northsight to pay the third party bank or for the third party bank to release its claim to the property.  If Northsight is not successful in its defense, then its exposure is $77,000 plus potential fees and interest.


The Company believes it properly received the proceeds and is being represented by legal counsel to defend its position.  A contingency exists with respect to this matter, the ultimate resolution of which cannot be presently determined.




ITEM 1A.    RISK FACTORS


Not applicable to Smaller Reporting Issuers.




ITEM 2.   CHANGES IN SECURITIES


During the three months ended March 31, 2010 the Company’s Board authorized a private placement of up to 5,000,000 shares at $1.00 per share to accredited investors.   As of March 31, 2010 the Company had accepted subscriptions representing 1,335,000 shares.


Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 42

 
During the three months ended March 31, 2010, the Company converted 1,905,948 of its stock options to Restrictive Stock Units (“RSUs”).  The Board also granted 2,200,000 RSUs to the Company’s key employees.


Exemption From Registration Claimed


All of the sales by the Company of its unregistered securities were made by the Company in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”). All of the individuals and/or entities listed above that purchased the unregistered securities were almost, all known to the Company and its management, through pre-existing business relationships, as long standing business associates and/or employees. All purchasers were provided access to all material information, which they requested, and all information necessary to verify such information and were afforded access to management of the Company in connection with their purchases. All purchasers of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition




ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


NONE




ITEM 4.   (RESERVED AND REMOVED)




ITEM 5.   OTHER INFORMATION


NONE


Two Rivers Water Company Amended 10Q March 31, 2010
 
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ITEM 6.   EXHIBITS


The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.


Number
Description
 


31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
Filed Herewith
31.2
Certification of Principal Financial Officer pursuant to the Section 302 of the Sarbanes-Oxley Act
Filed Herewith
32.1
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
Filed Herewith
32.2
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
Filed Herewith




Two Rivers Water Company Amended 10Q March 31, 2010
 
Page 44





   Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




 
 
TWO RIVERS WATER COMPANY (Registrant)
 
 
 
Dated: February24, 2011
 
 
By: /s/ John McKowen
 
Chief  Executive Officer & Chairman of the Board
 
By: /s/ Wayne Harding
 
Chief Financial Officer & Principal Accounting Officer