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EX-31.2 - TURV HARDING EXHIBIT 31 - TWO RIVERS WATER & FARMING Coexh31harding2011q2.htm
EX-32.2 - TURV HARDING EXHIBIT 32 - TWO RIVERS WATER & FARMING Coexh32harding2011q2.htm
EX-32.1 - TURV MCKOWEN EXHIBIT 32 - TWO RIVERS WATER & FARMING Coexh32mckowen2011q2.htm
EX-31.1 - TURV MCKOWEN EXHIBIT 31 - TWO RIVERS WATER & FARMING Coexh31mckowen2011q2.htm
 


UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 

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

For the quarterly period ended June 30, 2011
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 420, 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 |X| No |_|

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

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 August 1, 2011 there were 22,650,114 shares outstanding of the registrant's Common Stock.

 
 

 


   
Page
Item 1
Financial Statements (Unaudited)
 
 
June 30, 2011 and  December 31, 2010
1
 
Condensed Consolidated Statements of Operations – Three months and Six months ended June 30, 2011 and 2010
2
 
Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2011 and 2010
3
 
5
Item 2
17
Item 3
20
Item 4
21
 
 
Item 1
Legal Proceedings
22
Item 2
Changes in Securities
22
Item 3
Defaults Upon Senior Securities – Not Applicable
22
Item 4
Removed and Reserved.
22
Item 5
Other Information – Not Applicable
22
Item 6
Exhibits
23
 
SIGNATURES
 

 
 

 

TWO RIVERS WATER COMPANY AND SUBSIDIARIES

   
June 30, 2011
   
December 31, 2010
 
ASSETS:
 
Unaudited
       
Current Assets:
           
Cash and cash equivalents
  $ 383     $ 645  
Accrued interest receivable
    1       3  
Advances and accounts receivable
    70       38  
Farm product (Note 2)
    135       -  
Deposits
    41       -  
Prepaid expenses
    161       13  
Total Current Assets
    791       699  
  Property, equipment and software, net
    956       156  
Other Assets
               
Prepaid Cost Offering
    195       -  
Land (Note 2)
    1,615       1,279  
Water rights and infrastructure (Note 2)
    27,216       24,216  
Options on real estate and water shares (Note 2)
    -       100  
Dam construction (Note 2)
    521       489  
Discontinued operations - assets held for sale (Notes 2, 6)
    103       259  
Total Other Assets
    29,650       26,343  
TOTAL ASSETS
  $ 31,397     $ 27,198  
                 
LIABILITIES & STOCKHOLDERS' EQUITY:
               
Current Liabilities:
               
Accounts payable
  $ 436     $ 463  
Current portion of notes payable (Note 3)
    63       -  
Accrued liabilities
    268       114  
Total Current Liabilities
    767       577  
Notes Payable - Long Term (Note 3)
    12,358       9,128  
Total Liabilities
    13,125       9,705  
                 
Stockholders' Equity:
               
Common stock, $0.001 par value, 100,000,000 shares authorized, 22,325,114 and 19,782,916 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    22       20  
Additional paid-in capital
    33,155       28,949  
Accumulated (deficit)
    (17,040 )     (13,587 )
Total Two Rivers Water Company Shareholders' Equity
    16,137       15,382  
Noncontrolling interest in subsidiary (Note 2)
    2,135       2,111  
        Total Stockholders' Equity
    18,272       17,493  
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 31,397     $ 27,198  



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

 
Page 1

 

TWO RIVERS WATER COMANY AND SUBSIDIARIES

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Revenue
                       
Member assessments
  $ 48     $ 35     $ 48     $ 53  
                                 
Operating Expenses:
                               
    General and administrative
    1,773       957       2,836       1,675  
    Depreciation and amortization
    35       8       49       13  
        Total operating expenses
    1,808       965       2,885       1,688  
(Loss) from operations
    (1,760 )     (930 )     (2,837 )     (1,635 )
                                 
Other income (expense)
                               
Net interest expense
    (215 )     (115 )     (383 )     (133 )
Gain (Loss) on extinguishment of notes payable
    -       -       (188 )     -  
Other income (expense)
    1       (39 )     8       (88 )
   Total other income (expense)
    (214 )     (154 )     (563 )     (221 )
Net (Loss) from continuing operations before taxes
    (1,974 )     (1,084 )     (3,400 )     (1,856 )
Income tax (provision) benefit
    -       -       -       -  
Net (Loss) from continuing operations
    (1,974 )     (1,084 )     (3,400 )     (1,856 )
                                 
Discontinued Operations (Note 10)
                               
Loss from operations of discontinued real estate and mortgage business
    (9 )     (363 )     (31 )     (525 )
Income tax (provision) benefit
    -       -       -       -  
(Loss) on discontinued operations
    (9 )     (363 )     (31 )     (525 )
Net (Loss)
    (1,983 )     (1,447 )     (3,431 )     (2,381 )
Net loss (income) attributable to the noncontrolling interest (Note 2)
    (24 )     200       (24 )     273  
Net (Loss) attributable to Two Rivers Water Company
  $ (2,007 )   $ (1,247 )   $ (3,455 )   $ (2,108 )
                                 
(Loss) Per Share - Basic and Dilutive:
                               
(Loss) from continuing operations
    (0.09 )     (0.10 )     (0.16 )     (0.17 )
(Loss) from discontinued operations
    -       (0.03 )     -       (0.05 )
Total
  $ (0.09 )   $ (0.13 )   $ (0.16 )   $ (0.22 )
                                 
Weighted Average Shares Outstanding:
                               
   Basic and Dilutive
    22,054       11,267       21,054       10,700  


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

 
Page 2



TWO RIVERS WATER COMPANY AND SUBSIDIARIES


   
For the six months ended June 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net (Loss)
  $ (3,431 )   $ (2,381 )
Adjustments to reconcile net income or (loss) to net cash (used in) operating activities:
         
Depreciation (including discontinued operations)
    27       32  
Amortization of debt issuance costs and pre-paids
    114       -  
Legendary Investment sale and write off
    -       49  
Increase in reserves and impairments
    -       337  
Recapture of impairments from REOs sold
    -       (75 )
Loss from REOs sold (discontinued operations)
    -       (17 )
(Gain) Loss on sale of investments and assets held
    27       (40 )
Noncontrolling interest in loss
    -       273  
Loss on extinguishment of notes payables
    188       -  
Stock based compensation and warrant expense
    1,456       630  
Stock for Services
    367       -  
Changes in operating assets and liabilities:
               
Decrease (increase) in deposits, prepaid expenses and other assets
    (177 )     13  
Farm product
    (135 )     (113 )
(Increase) in accounts receivable
    (32 )     (53 )
Decrease in income tax receivable
    -       62  
Decrease in L/T Mortgage
    129       -  
(Decrease) increase in accounts payable
    (27 )     257  
Increase in accrued liabilities and other
    156       (6 )
Net Cash (Used in) Operating Activities
    (1,338 )     (1,032 )
                 
Cash Flows from Investing Activities:
               
Investments (increased)/decreased
               
Boston real estate and other residential real estate
    -       (269 )
Proceeds from REO properties and other assets sold
    -       498  
Proceeds from asset held for sale
    -       176  
Proceeds from fixed assets sold
    -       13  
Purchase of property, equipment and software
    (707 )     (128 )
Purchase of land, water shares, infrastructure
    (336 )     (5,939 )
Dam construction
    (32 )     (273 )
Net Cash Provided by/(Used in) Investing Activities
    (1,075 )     (5,922 )
                 
Continued on next page
               

 
Page 3

 


Continued from previous page
             
               
Cash Flows from Financing Activities:
             
Proceeds from issuance of convertible notes
   2,000
     $
                       -
 
Payment of offering costs
 
                 (219)
     
                           -
 
Proceeds from financing
 
                         -
     
                           -
 
Payment on convertible notes
 
                   (38)
     
                           -
 
Payment on Note Payable
 
                  (100)
     
                           -
 
Payment for settlement of note payable
 
                  (105)
     
                           -
 
Options and warrants exercised
 
                     613
     
                           -
 
Increase in long term borrowings
 
                         -
     
                    4,944
 
Retirement of Common Stock
 
                      -
     
                        (6)
 
Private placement - net of offering costs
 
                         -
     
                    1,620
 
Net Cash Provided by Financing Activities
 
                  2,151
     
                    6,558
 
Net Increase in Cash & Cash Equivalents
 
                 (262)
     
                    (396)
 
Beginning Cash & Cash Equivalents
 
                    645
     
                       616
 
Ending Cash & Cash Equivalents
      383
   
      220
 
                 
Supplemental Disclosure of Cash Flow Information
             
Non-controlling interest
                 24
   
     (345)
 
Cash paid for Interest
242
   
  78
 
Cash received from Income tax refunds
        -
   
   61
 
Conversion of note receivable for loan on land
   -
   
295
 
Common stock issued for land and water share purchase
    -
   
    500
 
Increase in Water Shares due to acquisition costs
   -
   
 174
 
Increase in note receivable from sale of Legendary Investment
    -
   
   9
 
Common stock issued in conjunction with extinguishment of notes payable
  1,500
   
   -
 
Acquisition of Orlando Reservoir for Seller financed note payable
 3,000
   
    -
 
Equipment purchases financed
  120
   
    -
 


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

 
Page 4


TWO RIVERS WATER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2011 and June 30, 2010
 (Unaudited)


NOTE 1 – ORGANIZATION AND BUSINESS
 
GENERAL
 

The following is a summary of some of the information contained in this document.  Unless the context requires otherwise, references in this document to “Two Rivers Water Company,” “Two Rivers,” or the “Company” is to Two Rivers Water Company and its subsidiaries. The “Farming Business” refers to Two Rivers’ development and operating of irrigated farmlands.  The “Water Business” refers to Two Rivers’ acquisition of water rights, the improvement of water storage and distribution assets and the use of water rights in farming and other markets.
 
Two Rivers was incorporated in December 2002 in the state of Colorado.  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 centered in Colorado.

Two Rivers maintains a website at www.2riverswater.com, which is not incorporated in, and is not a part of, this report.

Two Rivers currently operates irrigated farming operations along with a water acquisition, development and distribution business in southern Colorado.  Detailed information on Two Rivers’ Business and organization is available in the Company’s 2010 10K filing.

On January 28, 2011, Two Rivers through a wholly-owned subsidiary, TRW Orlando Water Assets, LLC, purchased the Orlando Reservoir (“Orlando”) containing 3,110 acre feet of storage and 9 cubic feet per second (cfs) of direct flow water rights for $3,100,000.

In the six months ended June 30, 2011, Two Rivers completed a $2,000,000 convertible debt offering to fund the development of farmland, water assets and other related assets held in Two Rivers Farms F-1, LLC (“F-1”), a wholly owned subsidiary.

On April 5, 2011, the Company formed Two Rivers Farms F-2, LLC (“F-2”) to acquire and dedicate 1,500 acres of farmland and associated water rights to grow organic alfalfa and hay.  F-2 farmland will be prepared and planted in the fall of 2011 to begin production in 2012.  In June, 2011, the Company offered $6,000,000 through a convertible debt offering in order to fund the transfer and purchase of farming land, water shares, irrigation, and land preparation for the 1,500 acres.  On July 22, 2011, the Company closed on $3,355,000 of this offering.


SUBSIDIARIES

Two Rivers is the parent company and owns 100% of HCIC Holdings LLC (“HCIC”), Two Rivers Water LLC, and Two Rivers Farms LLC.  HCIC owns 91% of the Mutual Ditch Company as of June 30, 2011.   Two Rivers Farms, LLC owns 100% of Two Rivers Farms F-1, LLC and Two Rivers Farms F-2, LLC.

Two Rivers Water Company June 30, 2011 10Q
 
Page 5




HCIC HOLDINGS, LLC

On August 17, 2009, Two Rivers, and Two Rivers Basin, LLC an unrelated Colorado limited liability company (“TRB”), formed HCIC, a joint venture.

On September 14, 2010, the Company obtained 100% ownership of HCIC.  The owners of TRB were issued 7,500,000 shares of the Company’s common stock in exchange for 100% of their ownership in HCIC.  This transaction was booked at fair value and substantiated by an independent third party appraisal as of March 2, 2010 and updated as of September 30, 2010.

HUERFANO-CUCHARAS IRRIGATION COMPANY

Huerfano-Cucharas Irrigation Company (“Mutual Ditch 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 June 30, 2011 and December 31, 2010, HCIC owned 91% of Mutual Ditch Company.

TWO RIVERS FARMS, LLC

The Company formed Two Rivers Farms, LLC (“Farms”) 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, Farms plans to lease water from the Mutual Ditch Company and other sources to produce agriculture crops.

Two Rivers intends to hold whatever ownership interest it has in the Farming Business within Two Rivers Farms, LLC and the wholly owned subsidiaries of Farms.

During the 2010 growing season, approximately 400 acres of land were farmed. The crops were wheat and feed corn.  During the 2011 season, Farms, through a lease with F-1 plans to re-plant 500 acres of land with hay and alfalfa for production in 2012.  Farms, through a lease with F-2, plans to prepare 1,500 acres of farmland and plant organic alfalfa for production in 2012.

TWO RIVERS FARMS F-1, LLC

On January 21, 2011 the Company formed Two Rivers Farms F-1, LLC (“F-1” and previously registered with the Colorado Secretary of State as Two Rivers Farms T-1, LLC) to hold certain farming assets and as an entity to acquire debt for the Company’s expansion of the Farm Business.   F-1 leases the farm land and farming assets back to Farms as the operator of farming activities.

TWO RIVERS FARMS F-2, LLC

On April 5, 2011 the Company formed Two Rivers Farms F-2, LLC (“F-2”) to hold certain farming assets and as an entity to acquire debt for the Company’s expansion of the Farm Business.   F-2 leases the farm land and farming assets back to Farms as the operator of farming activities.

TWO RIVERS WATER, LLC

The Company formed Two Rivers Water, LLC to secure additional water rights, rehabilitate water storage structures and to develop one or more special water districts.

Two Rivers Water Company June 30, 2011 10Q
 
Page 6

 
DISCONTINUED OPERATIONS

Two Rivers is completing the sale or dissolution of its prior business entities including, Legendary Investment Group, LLC (“Legendary”) sold on June 30, 2010; Northsight, Inc. (formerly Navidec Mortgage Holdings, Inc.), and Southie Developments (“Southie”).  Together these entities are referred to as “Discontinued Operations.”


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information 

The interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) as promulgated in Item 210 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position as of June 30, 2011, results of operations for the three months and six months ended June 30, 2011 and 2010, and cash flows for the six months ended June 30, 2011 and 2010, as applicable, have been made.  The results for these interim periods are not necessarily indicative of the results for the entire year.  The accompanying financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Form 10-K.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Two Rivers and its subsidiaries, HCIC, Mutual Ditch Company, Farming, Water, and its Discontinued Operations.  All significant inter-company balances and transactions have been eliminated in consolidation.

Non-controlling Interest

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

As of June 30, 2011 and December 31, 2010, respectively, the non-controlling members’ equity in the Mutual Ditch Company was $2,135,000 and $2,111,000.

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.

Two Rivers Water Company June 30, 2011 10Q
 
Page 7

 
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.

As of June 30, 2011, the Company had approximately $349,000 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.

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 June 30, 2011 there was an allowance of $144,000 against a long term mortgage balance of $247,000 and as of December 31, 2010, there was an allowance of $144,000 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 three and six months ended June 30, 2011 and 2010, nor the year ended December 31, 2010.

Fair Value of Financial Instruments and Other Assets

The Company records fair value of monetary and nonmonetary instruments in accordance with FASB Accounting Standards Codification (“ASC”) 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 (as amended by Accounting Standards Update 2011-04), 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.

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).

Two Rivers Water Company June 30, 2011 10Q
 
Page 8

 
The appraisal performed by an engineering company 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.

As of June 30, 2011 the Company possesses water rights whose fair value will be measured at least on an annual basis.  The Company possesses financial instruments of a short-term nature, such as cash, prepaid expenses, advances receivable, accounts payable accrued liabilities, and advances payable, whose fair value approximates carrying value due to their short maturities.

As of June 30, 2011 and December 31, 2010, the Company has long term debt.  The carrying amount of this long term debt approximated fair value based upon the terms and conditions currently available to the Company in comparison to the terms and conditions of the existing debt.

Farm Product

As the growing season progresses, the Company invests in farm inputs.  These inputs are capitalized, carried as current assets, and when the crop is sold, recognized as a cost of the crop sold.

Discontinued Operations Assets Held for Sale

The Company carries its notes receivable at cost or loan balance, subject to management’s estimate of impairments.  The book value of these financial instruments, after adjustment of the impairments, is representative of their fair values. As of June 30, 2011, the Company had a total of $103,000 invested in a mortgage receivable, net of an allowance for bad debt of $144,000.  On December 31, 2010, the Company had a total of $227,000 invested in a mortgages receivable, net of an allowance for bad debt of $144,000.

The Company owns property it acquired through foreclosing proceedings.  At December 31, 2010, the property was held for sale.  During the six months ended June 30, 2011, this property was sold.

   
June 30, 2011
   
Dec 31, 2010
 
Real estate owned
  $ -       123,000  
Allowance for:
               
Real Estate  owned – depreciation
    -       -  
Real Estate owned – impairments
    -       93,000  
Total
  $ -       30,000  

Intangibles

Two Rivers recognizes the estimated fair value of water rights acquired by the Company’s purchase of stock in the Mutual Ditch Company.   This intangible asset will not be amortized because it has an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado.  Once per year, or more often if certain evidence is present that would indicate impairment is possible, 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.

Options on Land and water shares

Upon purchasing water shares and land, or options thereon, the value is recorded at purchase price.  Management evaluates the carrying value, and if the carrying value is in excess of fair market value, 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.

Two Rivers Water Company June 30, 2011 10Q
 
Page 9

 
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.

Convertible Debt

During the six months ended June 30, 2011, the Company closed on $2,000,000 in convertible notes.  These notes bear interest at 5% plus 1/3 of the crop profit that was financed through the convertible notes.   The convertible debt has a conversion feature to convert at each $2.50 share of debt into one share of the Company’s common stock.   In accordance with applicable accounting guidance, the Company valued the convertible notes at its carrying value which approximated fair value since at the time of issue there was no beneficial conversion feature with the current price of the Company’s stock being less than the conversion price.  Further, the convertible option of the note cannot be separated nor valued from the note.

Revenue Recognition

Farm Revenues

Revenues from farming operations are recognized when sold into the market.  All direct expenses related to farming operations are capitalized as inventory and recognized as a direct cost of sale upon the sale of the crops.

Water Revenues

The Company recognizes revenues from water leases when the water is consumed and invoiced.

Stock Based Compensation

Beginning January 1, 2006, the Company adopted the provisions of ASC 718, Compensation – Stock Compensation 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 June 30, 2011 10Q
 
Page 10

 
Net Income (Loss) per Share

Basic net income per share is computed by dividing net income (loss) attributed to Two Rivers available to common shareholders for the period by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period.

The dilutive effect of 4,615,474 Restrictive Stock Units (“RSUs”), 1,586,533 options and 100,000 warrants at June 30, 2011, has not been included in the determination of diluted earnings per share since they would be anti-dilutive.

Recently issued Accounting Pronouncements

There were various accounting standards and interpretations issued in the six months ended June 30, 2011, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.


NOTE 3 – NOTES PAYABLE

Beginning on September 17, 2009, Two Rivers began acquiring shares in the Mutual Ditch Company and related land from a Mutual Ditch Company shareholder.  As part of these acquisitions, many of the sellers financed notes payable with Two Rivers and HCIC.  As of December 31, 2010, these loans totaled $9,126,000. As of June 30, 2011, these loans totaled $7,401,000.   The notes carry interest at 6% per annum, interest payable monthly, the principal amounts due at various dates from September 1, 2012 through March 31, 2013, and are collateralized by the Mutual Ditch Company shares and land.

As of June 30, 2011, of the $7,401,000 in seller carry back notes, $2,114,000 provides the holders the right to convert some or all of the amounts owing into the Company’s stock at $1/share to $1.25/share.  The holder can convert anytime until the note is paid. These notes are due March 31, 2013 and September 30, 2013 with 6% annual interest, with the interest paid monthly.

During the six months ended June 30, 2011, the Company exchanged $1,575,000 in Mutual Ditch Company debt into 722,222 shares of the Company’s stock, a cash payment of $37,500, and $37,500 in an unsecured note due September 30, 2011.   An expense due to loss on extinguishment of note payable of $272,000 was recognized due to the difference between the stock price conversion and the fair market value of the Company’s common stock.

During the six months ended June 30, 2011, the Company offered holders of HCIC notes the option of an early payoff in exchange for a discount on the face amount of the note.   A total of $189,000 of notes was retired early and a gain on forgiveness of the HCIC notes of $84,000 was recognized and is netted against the loss of extinguishment of note payables in the statement of operations.

On January 28, 2011, the Company purchased water storage and direct flow from the Orlando Reservoir No. 2 Company, LLC (“Orlando”) for $3,100,000, which consisted of a cash payment of $100,000 and a seller financed note payable of $3,000,000.   The note is due January 28, 2014.  Interest is to be paid based on 50% of the Company’s gross profits received from all of the Company’s crop operations payment or sales where the water assets from Orlando are used and $40 per acre foot of water used.  The Company is accruing interest at 5% per annum until a better estimate can be made on the payments to be made to Orlando.   The holder of the note has an option to convert the amount of all outstanding principal and accrued and unpaid interest into common stock of Two Rivers at the conversion price of $4.00 per share.

Two Rivers Water Company June 30, 2011 10Q
 
Page 11

 
In February, 2011 the Company offered a $2,000,000 convertible debt offering.  This offering was closed at the end of February, 2011.  This offering financed the land, water rights, irrigation, and farm equipment for F-1.  The terms of this debt is interest at 5% per annum, one-third of the crop profit and the right to convert debt into Company common stock at $2.50/share.  The note is due March 31, 2014.  When the debt was issued and closed, the Company’s stock was traded for less than the conversion, so no additional beneficial interest was recognized.  Further, the one-third of crop profit will be recognized as a crop expense upon the sale of the crop.

Note
 
June 30, 2011 principal balance
   
June 30, 2011 accrued interest
   
Interest rate
 
Security
Mutual Ditch seller carry back
  $ 7,401,000     $ -       6 %
Shares in the Mutual Ditch Company
Orlando purchase
    2,900,000       37,000    
Various
 
Orlando assets
Convertible debt
    2,000,000       25,000       5 %
F-1 assets
Equipment loans
    119,000       -       5 - 8 %
Specific equipment
Total
  $ 12,420,000     $ 62,000            
                           


NOTE 4 – INFORMATION ON BUSINESS SEGMENTS
 
We organize our business segments based on the nature of the products activities. We primarily focus on the Farming and Water Business with Two Rivers Water Company as the parent company and Two Rivers Farms LLC (and its subsidiaries, Two Rivers Farms F-1, LLC and Two Rivers Farms F-2, LLC) and Two Rivers Waters LLC as subsidiaries.
 
Two Rivers Water Company also holds its legacy assets that include a mortgage notes receivable.  Prior real estate activity is held in Northsight and Northsight’s subsidiaries, Southie and Legendary. The summary of the legacy activity and assets is contained in the category “Discontinued Operations.”
 
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 June 30, 2011 10Q
 
Page 12


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

 
For the six months ended June 30, 2011
         
For the six months ended June 30, 2010
       
   
Parent
   
Farms
   
Water
   
Discon-
tinued
Ops
   
Total
   
Parent
   
Farms
   
Water
   
Discon-tinued
Ops
   
Total
 
Revenue
                                                           
Assessments
  $ -       -       48       -       48       -       -       53       -       53  
Other & misc.
    -       -       -       -       -       -       -       -       -       -  
Gross Profit
    -       -       48       -       -       -       -       53       -       53  
                                                                                 
Total Operating Expenses
    (2,409 )     (248 )     (228 )     -       (2,885 )     (1,266 )     (23 )     (399 )     -       (1,688 )
Total Other Income/(Expense)
    (37 )     (100 )     (426 )     -       (563 )     (49 )     1       (173 )     -       (221 )
Net (Loss) Income from continuing operations before income taxes
    (2,446 )     (348 )     (606 )     -       (3,400 )     (1,315 )     (22 )     (519 )     -       (1,856 )
Income Taxes (Expense)/Credit
    -       -       -       -       -       -       -       -       -       -  
                                                                                 
Net Income (Loss) from continuing operations
    (2,446 )     (348 )     (606 )     -       (3,400 )     (1,315 )     (22 )     (519 )     -       (1,856 )
                                                                                 
Discontinued operations:
                                                                               
(Loss) gain from operations of discontinued real estate and mortgage business
    -       -       -       (31 )     (31 )     11       -       -       (536 )     (525 )
Income tax benefit
    -       -       -       -       -       -       -       -       -       -  
Loss on discontinued operations
    -       -       -       (31 )     (31 )     11       -       -       (536 )     (525 )
                                                                                 
Non-controlling interest
    -       -       (24 )     -       (24 )     -       -       273       -       273  
                                                                                 
Net (Loss) Income
  $ (2,446 )     (348 )     (630 )     (31 )     (3,455 )     (1,304 )     (22 )     (246 )     (536 )     (2,108 )
                                                                                 
Segment assets
  $ 888       1,002       29,497       9       31,397       827       208       13,161       2,496       16,692  

Two Rivers Water Company June 30, 2011 10Q
 
Page 13



NOTE 5 - EQUITY TRANSACTIONS


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, December 31, 2010
    1,745,562     $ 1.37  
Granted
    293,333     $ 1.49  
Cancelled
    -       -  
Expired
    -       -  
Exercised
    452,362     $ 1.25  
Outstanding, June 30, 2011
    1,586,533     $ 1.42  
Options Exercisable , June 30, 2011
    1,526,533     $ 1.37  

During the year ended December 31, 2010, $72,000 in option and warrant expense was recognized.  During the six months ended June 30, 2011, $456,000 in option and warrant expense was recognized, and $44,000 options issued at fair value was recorded as cost of debt (interest expense).

Northsight has an option plan with 200,000 options outstanding and exercisable at June 30, 2011. If all of the Northsight options outstanding at June 30, 2011 were exercised, the impact on the minority interest would be immaterial.

During the year ended December 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.  Further, during the year ended December 31, 2010, an additional 3,807,140 RSUs were granted to the Company’s key employees.  The expense recognized for the year ended December 31, 2010 is $4,841,000.  During the six months ended June 30, 2011, the expense recognized was $999,000. The remaining unamortized amount, including stock option expense, is $6,013,000.  Upon the change of RSU vesting schedules, the valuation of the RSUs were recomputed and amortized in 2010.  The RSUs vest over a three year period, beginning in January, 2011.

During the three months ended June 30, 2011, the Company issued 253,333 options with a $1.25/share strike price and vesting immediately to a consultant for compensation of the consultant’s work in the F-1 convertible debt offering and closing.  Using the black shoals method, the fair value of these options  is estimated to be $526,000.  This amount is being amortized over the three-year life of the convertible note, or $44,000 per quarter and is recognized as interest/debt expense.
 
Two Rivers Water Company June 30, 2011 10Q
 
Page 14

 
 
   
Shares
   
Exercise Price
 
Outstanding,  January 1, 2010
    -        
Granted
    5,713,088     $ -  
Cancelled
    -          
Expired
    -          
Exercised
    -          
Outstanding, December 31, 2010
    5,713,088          
Granted
    50,000          
Cancelled
    -          
Expired
    -          
Exercised
    1,147,614     $ -  
Outstanding, June 30, 2011
    4,615,474     $ -  
RSUs Exercisable , June 30, 2011
    -     $  

Warrants
 
As of June 30, 2011, the Company has 100,000 warrants outstanding, with an excise price of $1.00/share and expiring on December 31, 2011.  During the six months ended June 30, 2011, 50,000 warrants were exercised at $1/share with net proceeds of $50,000 to the Company.
 

 
NOTE 6 – 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, 2011.

The assets to be liquidated are presented at the lower of cost or current market values, as of June 30, 2011 and December 31, 2010 and are detailed as follows:

(in thousands)
 
June 30, 2011
   
Dec 31, 2010
 
Mortgages receivable
  $ 247       373  
Other real estate owned
    -       123  
Subtotal
    247       496  
Less allowances and depreciation
    (144 )     (237 )
Net book value of property to sell
    103       259  
Less amounts owed on real estate to be sold
    -       -  
Net projected proceeds from discontinued operations assets held for sale
  $ 103       259  

Within the discontinued operations, during the six months ended June 30, 2011 and 2010, the Company recognized a loss on disposal of real estate of $27,000 and $44,000 respectively.

Within the discontinued operations, during the six months ended June 30, 2011 and 2010, the Company had $0 and $41,000 in revenue net of $44,000 loss on REO sales, respectively.

Within the discontinued operations, during the three months ended June 30, 2011 and 2010, the Company recognized a loss on disposal of real estate of $8,000 and $52,000 respectively.

Two Rivers Water Company June 30, 2011 10Q
 
Page 15

 
Within the discontinued operations, during the three months ended June 30, 2011 and 2010, the Company had $0 and $68,000 in revenue plus an $8,000 gain on REO sales, 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 subsidiary, Northsight.


NOTE 7 – LEGAL PROCEEDINGS

Please refer to the Company’s December 31, 2010 10K filing.  There have been no material changes since the 10K filing.


NOTE 8 – SUBSEQUENT EVENTS

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

Subsequent to June 30, 2011 and through August 9, 2011, the Company had the following material items:
-  
The Orlando purchase agreement was modified to include the purchase of the assets through a non-affiliated entity with the entity also owning land.  On July 29, 2011, $700,000 was paid toward the purchase of the entity and 325,000 of the Company’s common shares were issued to the sellers.
-  
A grantee of 740,474 RSU shares returned the shares the Company; thereby refusing to take delivery of the shares for income tax purposes.  Under IRS regulations, the grantee has up to 12 months to take delivery of the shares.
 
The Company closed on the initial funding of $3,740,000 of the F-2 $6,000,000 offering. The offering includes warrants.  With the initial closing, 1,496,000 warrants have been issued with a strike price of $2.50/share.


 
Two Rivers Water Company June 30, 2011 10Q
 
Page 16





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.


Overview

During 2009, Two Rivers focused its business development activities on irrigated farming and water rights acquisition.    Due to this new business focus, the Company continued winding down its real estate activities through its subsidiaries Northsight and Southie.  Funds generated from the liquidation of real estate promissory notes receivable and selling residential real estate, Two Rivers entered into the Farming and Water Business beginning in July 2009.  There can be no assurances that any of our investments will be successful.

The Farming Business is seasonal.   Further, we are buying farmland that has not been productive for many years.  We expend capital preparing the land for farming, acquiring water rights, building efficient irrigation systems in order for the land to grow crops.  Further, farm inputs (expenses relating to planting and growing the crops) are expended during planting until harvest.   These expenses are capitalized as Farm Product and then expensed when the harvest and sale of crops occur.    Each calendar quarter, the Company’s management assesses the need for any impairment of the crop based on the anticipated sales price and yield of the crops planted.

The Company is planning to add another 1,500 acres for crop production.  We are targeting land in Huerfano County, Colorado to grow organic alfalfa and hay.   The capital to purchase and develop the 1,500 acres of farmland and the associated water rights will be met through a planned “Series B” convertible debt offering to accredited investors.   The offering was issued in June, 2011 and $3,740,000 was closed through August 5, 2011.


Results of Operations

For the three Months Ended June 30, 2011 Compared to the three Months Ended June 30, 2010

During the three months ended June 30, 2011, we recognized revenues from continuing operations of $48,000 compared to $35,000 in revenues from continuing operations during the three months ended June 30, 2010.   Revenues were a result of Mutual Ditch Company assessments not paid by the Company.

Two Rivers Water Company June 30, 2011 10Q
 
Page 17

 
Within our discontinued operations, during the three months ended June 30, 2011 and 2010 we recognized revenues of $ -0- compared to $17,000 (not including of $8,000 gain from REO sales), respectively.  The decrease of $17,000 in our discontinued operations is a result of our company’s new focus on the Farming and Water Business and the liquidation of our legacy mortgage and real estate business.

Operating expenses from continuing operations during the three months ended June 30, 2011 and 2010 were $1,808,000 and $965,000, respectively.  The increase of $843,000 is primarily due to the non-cash expense of granting of options, warrants and restrictive stock units ($959,000 for the three months ended June 30, 2011 compared to $362,000 for the three months ended June 30, 2010).  Management expects the expenses will continue to increase as we expand our business focus in irrigated farming and water.

For continuing operations, during the three months ended June 30, 2011 and 2010, we recognized a net loss of $1,974,000 and $1,084,000, respectively.  The increased loss of $890,000 is due from an increase of stock based compensation expense and our rapid expansion of the Farming and Water Business.

For the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

During the six months ended June 30, 2011, we recognized revenues from continuing operations of $48,000 compared to $53,000 in revenues from continuing operations during the six months ended June 30, 2010.   Revenues were a result of Mutual Ditch Company assessments not paid by the Company.

Within our discontinued operations, during the six months ended June 30, 2011 and 2010 we recognized revenues of $ -0- compared to $41,000 (net of $44,000 loss from REO sales), respectively.  The decrease of $41,000 in our discontinued operations is a result of our company’s new focus on the Farming and Water Business and the liquidation of our legacy mortgage and real estate business.

Operating expenses from continuing operations during the six months ended June 30, 2011 and 2010 were $2,885,000 and $1,688,000, respectively.  The increase of $1,197,000 is primarily due to the non-cash expense of granting of options, warrants and restrictive stock units ($1,456,000 for the six months ended June 30, 2011 compared to $579,000 for the six months ended June 30, 2010).  Management expects the expenses will continue to increase as we expand our business focus in irrigated farming and water.

For continuing operations, during the six months ended June 30, 2011 and 2010, we recognized a net loss of $3,400,000 and $1,856,000, respectively.  The increased loss of $1,544,000 is due from an increase of stock based compensation expense and our rapid expansion of the Farming and Water Business.

LIQUIDITY

From the Company’s inception through June 30, 2011, we have funded our operations primarily from the following sources:
-  
Equity proceeds through private placements of Two Rivers securities and convertible debt;
-  
Revenue generated from operations;
-  
Loans and lines of credit (none currently available);
-  
Sales of residential properties acquired through deed-in-lieu actions;
-  
Sales of equity investments, and
-  
Proceeds from the exercise of legacy Navidec, Inc. Options
 

 
Two Rivers Water Company June 30, 2011 10Q
 
Page 18

 
Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital.  As of June 30, 2011, the Company had cash and cash equivalents of $383,000.  Cash flow consumed by our operating activities totaled 1,338,000 for the six months ended June 30, 2011 compared to operating activities consuming $1,032,000 for the six months ended June 30, 2010.

As of June 30, 2011, the Company had $791,000 in current assets and $767,000 in current liabilities.  The Company intends to continue with its strategy of expanding their Farming and Water Business.  Capital for this expansion and support of operations is generated from private placement of its convertible debt offerings.

Cash flows used by our investing activities for the six months ended June 30, 2011 were $1,075,000 compared to $5,922,000 for the six months ended June 30, 2010.  The decrease is primarily due to the completion of our purchases of the shares in the Mutual Ditch Company partially offset by investments in farming equipment, farming irrigation and the Orlando water rights, water storage and land purchase.

Net cash produced in financing activities was $2,151,000 for the six months ended June 30, 2011 compared to a production of cash of $6,558,000 for the six months ended June 30, 2010.  During the six months ended June 30, 2011 we completed our convertible debt offering of $2,000,000 retired selected debt and had $50,000 in warrant exercises.

During the six months ended June 30, 2010, we generated $4,944,000 in cash from Mutual Ditch Company seller financing and $1,620,000 from our private placement.

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.

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.


GOODWILL AND INTANGIBLE ASSETS

During the year ended 2010 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.

Two Rivers Water Company June 30, 2011 10Q
 
Page 19


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 June 30, 2011,  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 June 30, 2011, 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 year, 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 an impairment charge is recorded.

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.



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 June 30, 2011, 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 June 30, 2011 10Q
 
Page 20

 

Evaluation of Disclosure Controls and Procedures

Based on an evaluation as of the end of the first quarter ended June 30, 2011, our Chief Financial Officer has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and in providing reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, specifically the Chief Executive Officer and Chief Financial Officer and board, as appropriate to allow timely decisions regarding required disclosures.

As required by SEC Rule 15d-15(b), our Chief Executive 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 June 30, 2011.  Based on the foregoing  evaluation, our Chief Executive Officer has concluded and determined that our internal controls over financial reporting and therefore our disclosure controls and procedures are ineffective in timely alerting him to material information required  to be included in our  periodic  SEC filings and to ensure that information required to be disclosed in  our periodic SEC filings is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.


Remediation of Material Weaknesses in Internal Control Over Financial Reporting

As previously disclosed in our past filings with the SEC, management identified material weaknesses in our internal control over financial reporting for the years ended December 31, 2010 and 2009. The weaknesses that the Company previously disclosed related to (a) our lack of adequate processes for monitoring our financial reporting and accounting processes and our failure to conduct a comprehensive review of our account balances and transactions; (b) our lack of appropriate processes and procedures, including inadequate segregation of duties; and (c) our lack of appropriate processes and procedures in relation to the timely review of material documents and transactions for accounting and disclosure purposes. In order to remediate these material weaknesses management plans to retain accounting and financial consultants later in 2011 to assist in the designed and implementation of processes and controls to ensure that (a) all material transactions are properly recorded, reviewed and approved; (b) all significant accounts are reconciled on a timely basis; (c) duties are properly segregated; and, (d) complex accounting issues are properly evaluated and accounted for in accordance with GAAP.

We believe that while not all of the previously identified material weaknesses are fully remediated, our processes are improving and we anticipate making additional improvements in our internal control over financial reporting in fiscal year 2011.  However, due to our size it will be unlikely we can justify the hiring of the necessary staff to implement controls required to fully satisfy COSO procedures.

There  was no material change in our  internal  control  over  financial  reporting  that occurred  during the period,  that has  materially affected,  or is reasonably  likely to materially  affect,  our internal control over financial reporting.


Two Rivers Water Company June 30, 2011 10Q
 
Page 21


 

ITEM 1.    LEGAL PROCEEDINGS

Please refer to the Company’s December 31, 2010 10K filing.


ITEM 1A.    RISK FACTORS

Not applicable to Smaller Reporting Issuers.


ITEM 2.   CHANGES IN SECURITIES

During the period of April 1, 2011 through June 30, 2011, the Company made no issuances of its unregistered securities.

During the six months ended June 30, 2011, the Company exchanged 722,222 shares of its common stock for the retirement of $1,500,000 of Mutual Ditch Company seller financing.

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”) and Regulation D promulgated thereunder. 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 June 30, 2011 10Q
 
Page 22

 
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 June 30, 2011 10Q
 
Page 23


SIGNATURES

   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: August 10, 2011
 
 
By: /s/ John McKowen
 
Chief  Executive Officer & Chairman of the Board
 
By: /s/ Wayne Harding
 
Chief Financial Officer & Principal Accounting Officer