TWO RIVERS WATER & FARMING Co - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - TWO RIVERS WATER & FARMING Co	Financial_Report.xls
EX-31.1 - CERTIFICATION - TWO RIVERS WATER & FARMING Co	turv_ex321.htm
EX-31.1 - CERTIFICATION - TWO RIVERS WATER & FARMING Co	turv_ex311.htm
EX-31.2 - CERTIFICATION - TWO RIVERS WATER & FARMING Co	turv_ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2014

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _________ to _____________

Commission file number: 000-51139

Two Rivers Water & Farming Company

(Exact Name of Registrant as Specified in Its Charter)

	Colorado		13-4228144
	(State or Other Jurisdiction or Incorporation or Organization)		(I.R.S. Employee Identification No.)

	2000 South Colorado Blvd. Tower 1, Suite 3100 Denver, Colorado		80222
	(Address of Principal Executive Offices)		(Zip Code)

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

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

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 o

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	o		Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o		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 o No x

As of August 11, 2014 there were 26,343,490 shares outstanding of the registrant's Common Stock.

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20

PART II – OTHER INFORMATION
Item 1A.	Risk Factors	21
Item 6.	Exhibits	21

SIGNATURE		22

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

	Page
Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013	4
Condensed Consolidated Statements of Operations – Three months ended June 30, 2014 and 2013 and six months ended June 30, 2014 and 2013	5
Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2014 and 2013	6
Notes to Condensed Consolidated Financial Statements	7

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (In Thousands)

	June 30, 2014 (Unaudited)			December 31, 2013 (Derived from Audit)
ASSETS:
Current Assets:
Cash and cash equivalents	$	1,868		$	2,069
Advances and accounts receivable		3			54
Subscription receivable		1,300			-
Farm product		908			29
Deposits and other current assets		110			108
Total Current Assets		4,189			2,260
Long Term Assets:
Property, equipment and software, net		2,042			1,892
Land		5,278			4,978
Water rights and infrastructure		31,411			31,507
Intangible assets, net		977			997
Other long term assets		76			68
Total Long Term Assets		39,784			39,442
TOTAL ASSETS	$	43,973		$	41,702

LIABILITIES & STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable	$	208		$	47
Accrued liabilities and unearned revenue		367			317
Preferred shares and membership dividends payable		178			-
Current portion of notes payable		1,133			2,759
Total Current Liabilities		1,886			3,123
Notes Payable - long term, net of current portion		11,258			12,961
Total Liabilities		13,144			16,084
Commitments & Contingencies (Note 4)
Stockholders' Equity:
Convertible preferred shares, $0.001 par value, 4,000,000 shares authorized, 200,000 shares outstanding at June 30, 2014 and 3,794,000 shares outstanding at December 31, 2013 (liquidation value of $200,000 and $3,794,000, respectively), net		152			2,851
Common stock, $0.001 par value, 100,000,000 shares authorized, 25,935,383 and 24,879,549 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively		26			25
Additional paid-in capital		68,876			60,220
Accumulated (deficit)		(59,068	)		(47,449	)
		9,986			15,647
Noncontrolling interest in subsidiaries		20,843			9,971
Total Stockholders' Equity		30,829			25,618
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	43,973		$	41,702

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013 (Restated)			2014			2013 (Restated)
Revenue
Farm revenue	$	-		$	48		$	-		$	48
Water revenue		-			-			-			-
Member assessments & other income		10			11			15			11
Total Revenue		10			59			15			59
Direct cost of revenue		-			(41	)		-			(41	)
Gross Margin		10			18			15			18
Operating Expenses:
General and administrative		1,005			1,490			1,843			3,346
Depreciation		124			110			249			239
Total operating expenses		1,129			1,600			2,092			3,585
Loss from Operations		(1,119	)		(1,582	)		(2,077	)		(3,567	)
Other Income (Expense)
Interest expense		(307	)		(198	)		(642	)		(371	)
Warrant expense		-			-			-			(28	)
Loss on debt extinguishment		-			(873	)		-			(873	)
Other income (expense)		(71	)		-			(60	)		5
Total other income (expense)		(379	)		(1,071	)		(703	)		(1,267	)
Net Loss from Continuing Operations before Taxes		(1,498	)		(2,653	)		(2,780	)		(4,834	)
Income tax (provision) benefit		-			-			-			-
Net Loss before Preferred Dividends and Non-Controlling interest		(1,498	)		(2,653	)		(2,780	)		(4,834	)
Preferred dividends		(177	)		-			(647	)		-
Net loss (income) attributable to the non-controlling interest		(5	)		7			(5	)		8
Net Loss Attributable to Common Shareholders	$	(1,680	)	$	(2,646	)	$	(3,432	)	$	(4,826	)

Loss Per Share - Basic and Dilutive:	$	(0.06	)	$	(0.11	)	$	(0.11	)	$	(0.20	)
Weighted Average Shares Outstanding:
Basic and dilutive		25,407			24,791			25,144			24,509

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (In Thousands)

	Six months ended June 30,
	2014			2013 (Restated)
Cash Flows from Operating Activities:
Net loss	$	(3,432	)	$	(4,826	)
Adjustments to reconcile net income or (loss) to net cash used in operating activities:
Depreciation and amortization		253			239
Accretion of debt discount		95			20
Assumption of assessments due to purchase of shares of Huerfano-Cucharas Irrigation Company		-			80
Stock-based compensation and warrant expense		296			1,396
Stock and options for services		210			822
Loss on sale of investments and assets held		72			967
Impairment of asset		34			-
Net change in operating assets and liabilities:
Decrease in advances & accounts receivable		50			88
(Increase) in farm product		(879	)		(364	)
(Increase) in deposits, prepaid expenses and other assets		(2	)		(49	)
Increase (decrease) in accounts payable		161			(188	)
Increase (decrease) in accrued liabilities and other		204			(214	)
Net Cash Used in Operating Activities		(2,938	)		(2,029	)
Cash Flows from Investing Activities:
Purchase of property, equipment and software		(206	)		(34	)
Purchase of land, water shares, infrastructure		(300	)		(1,335	)
Other		(8	)		-
Net Cash Used in Investing Activities		(513	)		(1,369	)
Cash Flows from Financing Activities:
Proceeds from sale of preferred units of TR Capital Partners, LLC		3,400			-
Proceeds from issuance of long-term debt		275			2,000
Proceeds from sale of convertible preferred shares of Dionisio Farms & Produce, Inc.		-			1,600
Payment of offering costs		-			(223	)
Payments on notes payable		(425	)		(253	)
Net Cash Provided by Financing Activities		3,250			3,124
Net Increase in Cash & Cash Equivalents		(201	)		(274	)
Beginning Cash & Cash Equivalents		2,069			1,340
Ending Cash & Cash Equivalents	$	1,868		$	1,066

Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	314		$	254
Stock & warrants for debt issuance costs	$	-		$	580

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

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2014 and June 30, 2013

(Unaudited)

NOTE 1 – ORGANIZATION AND BUSINESS

Corporate Information

Two Rivers Water & Farming Company (the “Company”) is a Colorado corporation with principal executive offices at 2000 South Colorado Boulevard, Tower 1, Suite 3100, Denver, Colorado, and its telephone number at that address is (303) 222-1000.

Organizational Restructuring

On January 29, 2014, the board of directors approved a plan to reorganize the Company’s subsidiaries in a more integrated manner based on functional operations. The Company formed a new company, TR Capital Partners, LLC (“TR Capital”), which issued all of its Common Units to the Company. TR Capital then initiated the transactions described below. Following the completion of those transactions in the third quarter of 2014, the Company expects that TR Capital and its other direct and indirect subsidiaries (excluding HCIC Holdings, LLC, or “HCIC,” and Huerfano-Cucharas Irrigation Company) (the “Transferring Subsidiaries”) will enter into a series of related transactions as the result of which assets and operations of the Transferring Subsidiaries will be transferred to TR Capital. As a result of those transactions, TR Capital would operate all of the operations formerly conducted by the Transferring Subsidiaries. The following chart shows the expected corporate organization following completion of the anticipated transactions among the Transferring Subsidiaries, as well as the principal operating areas to be managed by TR Capital:

The placement of Preferred Units is being effectuated by either (1) the holders of certain debt or equity securities of the Transferring Subsidiaries exchanging their ownership interest or debt holdings for Preferred Units or (2) the direct investment into TR Capital through the cash purchase of Preferred Units. These debt or equity securities or the cash consideration to purchase Preferred Units are collectively referred to as “Qualified Assets.”

The Qualified Assets are being exchanged into Preferred Units at a rate of $0.70 or $1.00. If new capital (cash) is invested in Preferred Units, for each new $1.00 of new capital, another $1.2988 of Qualified Assets can be converted into Preferred Units at a rate of $0.70. Additionally, the new capital (cash) purchases Preferred Units at a rate of $0.70. All other Qualified Assets are being exchanged into Preferred Units at a rate of $1.00.

The Preferred Units provide the member with the following:

●	The ability, upon exchange, to receive one share of the Company’s common stock and a warrant to purchase one-half of one share of the Company’s common stock for each Preferred Unit owned. The warrants will expire on January 31, 2019 and have a strike price of $2.10.

●	A quarterly dividend equal to 2% (8% annually) of based on the consideration exchanged or paid for the Preferred Units.

●	An annual distribution based on the Adjusted Gross Profit (as defined) of the Company.

As of June 30, 2014, $21,232,000 of cash and Qualified Assets was converted into 26,461,000 Preferred Units.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements do not include all of the disclosures required by accounting principles generally accepted in the U.S. (“GAAP”), pursuant to the rules and regulations of the SEC. The unaudited consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of June 30, 2014, and the consolidated results of operations and comprehensive income and cash flows of the Company for the three and six months ended June 30, 2014 and 2013. Due to the seasonality of the agriculture business and other factors, operating results for the three and six months ended June 30, 2014 and due to the seasonality of the agriculture business are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

These accompanying unaudited consolidated financial statements and related notes are condensed should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Interim disclosures do not necessarily repeat disclosures in the Annual Report.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Two Rivers and its subsidiaries, including TR Capital Partners and HCIC. All significant inter-company balances and transactions have been eliminated in consolidation.

Non-controlling Interest

Non-controlling interest is recorded for equity interests in the Company’s subsidiaries, including shares of HCIC, preferred shares of certain subsidiaries and Preferred Units of TR Capital, held by minority third-party investors. Below is the detail of non-controlling interest shown on the balance sheet:

Entity	June 30, 2014		December 31, 2013
TR Capital	$	17,167,000	$	-
HCIC		1,368,000		1,363,000
Two Rivers Farms F-1, Inc. 1		104,000		1,494,000
Two Rivers Farms F-2, Inc.1		1,453,000		3,933,000
Dionisio Farms & Produce, Inc. (“DFP”)1		751,000		3,181,000
Totals	$	20,843,000	$	9,971,000

1 It is expected that these entities will be owned by TR Capital after the organizational restructuring detailed in Note 1 is completed.

Based on Accounting Standards Codification (“ASC”) 815-40-25, the Company classified the TR Capital Preferred Units as permanent equity. Further, pursuant to the ASC 810-10, the Company determined that the TR Capital Preferred Units should be classified as a non-controlling interest in a subsidiary and shown separately within the Equity section of the Company’s Consolidated Balance Sheet.

Pursuant to ASC 470-20, the Company valued the Preferred Units by assessing the fair market value of the preferred units and the warrants and allocating those values to the face value of the Preferred Units.

The Preferred Units were valued based on the number of shares of the Company’s common stock into which the Preferred Units can be exchanged and price of the Company’s common stock on the date the Preferred Units were issued. Pursuant to a purchase agreement entered into as of January 31, 2014, the Qualified Assets were exchanged from Preferred Units on various dates between February 1, 2014 and June 30, 2014. The common stock price during that period ranged from $0.85 to $1.33 per share. In total, the 26,461,000 Preferred Units have a fair market value of $29,707,000 based on those common stock prices.

The fair market value of the warrants underlying the Preferred Units was determined using the Black Scholes model. Assumptions underlying the Black Scholes model were as follows:

Conversion date	2/1/14 - 2/4/14
Stock price	$	0.85 - $1.33
Exercise price	$	2.10
Term (in years)		5
Volatility		73.01 - 74.34	%
Annual rate of Quarterly Dividends		0	%
Discount rate - Bond Equivalent Yield		1.46% - 1.71	%

In total, the warrants underlying the Preferred Units have a fair market value of $1,659,000 based on these assumptions.

Reclassification

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

Use of Estimates

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

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers cash and cash equivalents to include highly liquid investments with original maturities of 90 days or less. Those are readily convertible into cash and not subject to significant risk from fluctuations in interest rates. The recorded amounts for cash equivalents approximate fair value due to the short-term nature of these financial instruments.

Farm Product

Farm product represents expenses directly attributed to the planting and cultivation of crop. Upon harvesting, the farm product is reduced in proportion of the revenue generated. The reduction of the farm product is recognized as direct cost of revenue.

Property and Equipment

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

Below is a summary of premises and equipment:

Asset Type	Life in Years	June 30, 2014			December 31, 2013
Office equipment, furniture, computers	5 – 7	$	11,000		$	11,000
Computers	3		42,000			40,000
Vehicles	5		45,000			45,000
Farm equipment	7 - 10		1,584,000			1,411,000
Irrigation system	10		989,000			989,000
Buildings	27.5		139,000			35,000
Website	3		7,000			7,000
Subtotal			2,817,000			2,538,000
Less: Accumulated depreciation			(775,000	)		(646,000	)
Net book value		$	2,042,000		$	1,892,000

Land

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

Water Rights and Infrastructure

Subsequent to purchase of water rights and water infrastructure, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there are no impairments on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.

Intangibles

The Company recognizes the estimated fair value of water rights acquired by the Company’s purchase of equity interests in HCIC and Orlando Reservoir No. 2 Company, LLC (“Orlando”). These intangible assets will not be amortized because they have an indefinite remaining useful life based on many factors and considerations, including, the historical upward valuation of water rights within Colorado.

Revenue Recognition

Farm Revenues

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

Water Revenues

Current water revenues are from the lease of water owned by HCIC to farmers in the HCIC service area and through re-leasing of water from the Pueblo Board of Water lease. Water revenues are recognized when the water is consumed.

Member Assessments

Once per year the HCIC board estimates HCIC’s expenses, less anticipated water revenues, and establishes an annual assessment per ownership share. One-half of the member assessment is recorded in the first quarter of the calendar year and the other one-half of the member assessment is recorded in the third quarter of the calendar year. Assessments paid by the Company to HCIC are eliminated in consolidation of the financial statements.

HCIC does not reserve against any unpaid assessments. Assessments due, but unpaid, are secured by the member’s ownership of HCIC. The value of this ownership is significantly greater than the annual assessments.

Stock-Based Compensation

Beginning January 1, 2006, the Company adopted the provisions of ASC 718 and accounts for stock-based compensation in accordance with ASC 718. Under the fair value recognition provisions of this standard, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which generally is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of ASC 718 apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.

All options granted prior to the adoption of ASC 718 and outstanding during the periods presented were fully vested at the date of adoption.

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 SAB 110 beginning January 2008.

Net Income (Loss) per Share

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

The dilutive effect of the outstanding 2,455,918 RSUs, 2,014,867 options and 9,890,209 warrants at June 30, 2014, has not been included in the determination of diluted earnings per share since, under ASC 260 they would anti-dilutive.

Recently issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU No. 2013-11”). ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with limited exceptions. ASU No. 2013-11 is effective for interim and annual periods beginning after December 15, 2013 and may be applied retrospectively. The adoption of the provisions of ASU No. 2013-11 is not expected to have a material impact on the Company’s financial position or results of operations.

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

NOTE 3 – INVESTMENTS AND LONG-LIVED ASSETS

Land

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

Water Rights and Infrastructure

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

Upon purchasing water rights, the value is recorded at the purchase price. If a majority interest is acquired in a company holding water assets (potentially with other assets including water delivery infrastructure, right of ways, and land), the Company determines the fair value of the assets. To assist with the valuation, the Company may consider reports from a third-party valuation firm. If the value of the water rights is greater than what the Company paid then a bargain purchase gain is recognized. If the value of the water assets are less than what the Company paid then goodwill is recognized.

Subsequent to purchase, management periodically evaluates the carrying value of its assets, and if the carrying value is in excess of fair market value, the Company will establish an impairment allowance. Currently, there are no impairments on the Company’s land and water shares. No amortization or depreciation is taken on the water rights.

Dam and Water Infrastructure Construction in Progress

The Company has commenced engineering for the reconstruction of the dam owned by the HCIC. In addition the Company is in the process of rehabilitating various outlet gates, pipes and water gates. These costs are capitalized, and not amortized or depreciated until the dam reconstruction is completed in accordance with ASC 360 and 835.

Reconstruction costs are as follows:

	Six Months ended		Year ended
	June 30, 2014		December 31, 2013
Beginning balance	$	34,000	$	34,000
Additions		-		-
Written off		34,000		-
Ending Balance	$	-	$	34,000

Intangible Assets

In November, 2012, the Company acquired the Dionisio produce business and related equipment for $1,873,000 plus accrued interest of $30,000. The purchase price was allocated as follows:

Produce business	$	1,037,000
Equipment		836,000
Prepaid interest		30,000
Ending balance	$	1,903,000

Based on the discounted cash flow analysis and assuming the average life of a customer is 20 years, the produce business has the following values:

	June 30, 2014			December 31, 2013
Customer list	$	580,000		$	580,000
Tradename		220,000			220,000
Residual goodwill		237,000			237,000
Purchase price		1,037,000			1,037,000
Less: Accumulated amortization		(60,000	)		(40,000	)
Intangible assets, net	$	977,000		$	997,000

The cost of the customer list and the tradename are being amortized on a straight-line basis over 20 years. The total amortization is $40,000 per year. The residual goodwill will be tested in December in each year for impairments, if any.

NOTE 4 – NOTES PAYABLE

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

	June 30, 2014					December 31, 2013
Note	Principal Balance			Accrued Interest		Principal Balance
HCIC seller carry back	$	7,670,000		$	-	$	7,896,000
Orlando seller carry back		188,000			36,000		188,000
Series A convertible debt		-			-		110,000
Series B convertible debt		225,000			20,000		405,000
CWCB		1,104,000			10,000		1,151,000
FirstOak Bank - Dionisio Farm		826,000			24,000		826,000
FirstOak Bank - Dionisio Farm		176,000			1,000		-
Seller Carry Back - Dionisio		590,000			18,000		590,000
FirstOak Bank - Mater		166,000			6,000		166,000
Seller Carry Back - Mater		25,000			-		25,000
McFinney Agri-Finance		642,000			-		645,000
Ellicott second mortgage		-			-		400,000
ASF Notes		528,000			3,000		2,036,000
Bridge Notes		-			-		1,300,000
Kirby Group		167,000			-		45,000
Equipment loans		537,000			13,000		485,000
Total		12,844,000		$	131,000		16,268,000
Less: HCIC discount		(453,000	)				(548,000	)
Less: Current portion		(1,133,000	)				(2,759,000	)
Long term portion	$	11,258,000				$	12,961,000

NOTE 5 – INFORMATION ON BUSINESS SEGMENTS

The Company organizes its business segments based on the nature of the products and services offered. It focuses on the Water and Farming Business with Two Rivers Water & Farming Company as the parent company. Therefore, it reports segments by these lines of businesses: Farms and Water. The Farms segment contains all of the Farming Business conducted by DFP, Two Rivers Farms F-1, Inc., and Two Rivers Farms F-2, Inc. The Water segment contains the Water Business operated by ASF Project 1, LLC, HCIC and Orlando. The “Parent” category is not a separate reportable operating segment. Segment allocations may differ from those on the face of the income statement.

In the following tables of financial data, the total of the operating results of these business segments is reconciled, as appropriate, to the corresponding consolidated amount. Certain corporate expenses not allocated to the business segments are recorded in “Total Operating Expenses” under Parent.

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

	Six Months Ended June 30, 2014												Six Months Ended June 30, 2013
	Parent			Farms			Water			Total			Parent			Farms			Water			Total
Revenue
Assessments	$	-		$	-		$	8		$	8		$	-		$	-		$	-		$	-
Farm revenue		-			2			-			2			-			48			-			48
Water revenue		-			-			-			-			-			-			11			11
Other & misc.		-			2			3			5			-			6			1			7
		-			4			11			15			-			54			12			66
Less: direct cost of revenue		-			-			-			-			-			-			40			40
Gross Margin		-			4			11			15			-			54			(28	)		26
Total Operating Expenses		1,473			202			418			2,093			2,199			967			420			3,586
Total Other Expense		605			90			7			702			78			54			1,142			1,274
Net Loss from Operations before Income Taxes		(2,078	)		(288	)		(414	)		(2,780	)		(2,277	)		(967	)		(1,590	)		(4,834	)
Income Taxes (Expense)/Credit		-			-			-			-			-			-			-			-
Net Loss from Operations		(2,078	)		(288	)		(414	)		(2,780	)		(2,277	)		(967	)		(1,590	)		(4,834	)
Non-controlling interest		-			-			5			5			-			-			8			8
Preferred dividends		647			-			-			647			-			-			-			-
Net Loss	$	(2,725	)	$	(288	)	$	(419	)	$	(3,432	)	$	(2,277	)	$	(967	)	$	(1,582	)	$	(4,826	)
Segment Assets	$	3,730		$	12,846		$	27,397		$	43,973		$	405		$	11,728		$	33,459		$	45,592

NOTE 6 – CORRECTION OF JUNE 30, 2013 FINANCIAL RESULTS

During the fourth quarter of the year ended December 31, 2013, the Company identified certain accounting errors in the calculation of the fair value of the new terms on the HCIC seller carryback notes that were refinanced and initially reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013. Upon recalculation of the fair value of the new debt, as in accordance with ASC 470-50-40-10 and ASC 820, the fair value of the new debt was adjusted to $7,037,000, which compared to the previously calculated debt fair value of $6,164,000. The newly calculated fair value produced a one-time $873,000 loss, rather than the previously recorded gain in the quarter ended June 30, 2013 of $93,000. Management believes the impact of these items, both individually and in the aggregate, to the year ended December 31, 2013 and to prior interim periods of June 30, 2013 and September 30, 2013 previously presented was not material.

Below is a summary of the correction on the Company’s condensed consolidated balance sheet as June 30, 2013:

	As Reported		Adjustments			As Corrected
Total Assets	$	45,592,000	$	-		$	45,592,000
Total Liabilities	$	17,233,000	$	1,270,000		$	18,503,000
Total Shareholders’ Equity	$	28,359,000	$	(1,270,000	)	$	27,089,000

Below is a summary of the correction on our condensed consolidated statement of operations for the three and six months ended June 30, 2013:

	As of June 30, 2013
	Three Months Ended			Six Months Ended

Net Loss As Reported	$	(1,679,000	)	$	(3,859,000	)
Adjustments:
Previously reported gain on debt extinguishment	$	94,000		$	94,000
Corrected amount of loss on debt extinguishment		(873,000	)		(873,000	)
Total adjustment		(967,000	)		(967,000	)
Corrected net loss	$	(2,646,000	)	$	(4,826,000	)
Loss per share as initially reported	$	(0.07	)	$	(0.16	)
Corrected loss per share	$	(0.11	)	$	(0.19	)
Variance	$	(0.04	)	$	(0.03	)

NOTE 7 – EQUITY TRANSACTIONS

Common Stock

During the six months ended June 30, 2013, the Company had the following common stock transactions:

●	In February 2013, the Company issued 179,348 shares of common stock to a consultant for work performed in 2012.

●	In February 2013, the Company issued 85,000 shares of common stock to the independent members of the Board of Directors in exchange for Board services rendered in 2012.

●	In March 2013, the Company issued 200,000 shares of common stock to a consultant for investor relations work performed in first quarter, 2013.

●	In March 2013, the Company issued 100,000 shares of common stock to an independent member of the DFP Board of Directors in exchange for Board services rendered in 2012.

●	In April 2013, the Company issued 400,000 of our common stock to an investor relations firm for services.

●	In June 2013, the Company returned 3,002 of our common stock from a profit sharing plan that was no longer in effect to our authorized but unissued common stock.

During the six months ended June 30, 2014, the Company had the following common stock transactions:

●	In May, 2014, the Company issued the following common stock:

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

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

●	In June, 2014, the Company issued the following common stock:

●	833,334 shares under our stock plan; and

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

NOTE 8 – SUBSEQUENT EVENTS

In May 2014 the Company arranged for the formation of GrowCo, Inc., a Colorado corporation (“GrowCo”), to provide greenhouses and processing facilities for licensed marijuana growers in Colorado. In July 2014 GrowCo issued the initial 20,000,000 shares of its common stock to TR Capital in exchange for TR Capital’s agreement to (a) sell, or otherwise make available, 300 acres of land and associated water rights in Pueblo and Huerfano Counties in Colorado and (b) provide GrowCo with capital needed to build out two independent marijuana grow facilities on such acreage.

Also in July 2014, the board of directors of GrowCo designated up to 10,000,000 shares of its common stock for issuance to management under equity incentive arrangements. Of those shares, 5,000,000 were issued to Timothy Beall, GrowCo’s Chief Operating Officer and are subject to vesting restrictions under which GrowCo will have the right to repurchase all or a portion of the shares for a $0.00001 per share if specified performance requirements are not met. The remaining 5,000,000 shares designated for issuance as equity incentives are reserved and available for future issuance.

On August 1, 2014, the Company announced plans under which 10,000,000 of the 20,000,000 shares of GrowCo common stock issued to TR Capital would be deposited with a trust formed for the benefit of holders of the Company’s common stock. Those 10,000,000 shares initially are to be distributed by TR Capital as a dividend to the Company, which expects to deposit the shares with an independent trustee, subject to irrevocable instructions to distribute 2,500,000 of the shares to record holders of the Company’s common stock as of each of January 1, 2015, April 1, 2015, July 1, 2015 and October 1, 2015. The distributions to those record holders would only be made when the GrowCo shares can be sold by the holders pursuant to an effective registration statement filed with the Securities and Exchange Commission or an exemption from such registration.

On July 18, 2014, the Company received the final payment of the $1,300,000 TR Capital subscription receivable.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Note about Forward-Looking Statements

This Form 10-Q contains forward-looking statements, such as statements relating to our financial condition, results of operations, plans, objectives, future performance and business operations. These statements relate to expectations concerning matters that are not historical facts. These forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties. Although we believe our expectations are based on reasonable assumptions, they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. 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

There is a water shortage in the arid regions of the southwestern United States. There is a municipal water shortage in Colorado (see CWCB study). The Colorado municipal water shortage has created a price differential, an arbitrage, of 5-10 to 1 increase in the price of municipal water over irrigation water. In the late 1800s, 85% of all water rights in Colorado were granted to and still are primarily held by agriculture. Since then, populations have increased and people have moved to the city.

First generation western water business models attempted to capture the water arbitrage by “buying and drying” the most productive irrigated farmland and moving the water to the cities, which decimated some agricultural communities. The buy and dry model has become politically, economically and legally untenable and is no longer capable of capturing the water arbitrage (see Governor's Executive Order). Two Rivers has built a new business model that reinvigorates, rather than ruins, agricultural communities and captures the water arbitrage in multiple stages through market transactions.

In the initial acquisition stage, Two Rivers’ acquires water rights through the purchase of irrigated farmland used for feed crop production and converts the farmland into fruit and vegetable crop production, which generate six times more revenue with better profit margins. In later stages, Two Rivers creates additional value for its shareholders by partnering with other economic activities in need of water resources. Those activities are as varied as the economy itself and presently include water augmentation programs to replace out of priority diversions, greenhouse development and leasing for licensed marijuana growers and establishing Metropolitan Districts to provide water to under-served communities.

Results of Operations

Our Consolidated Operations

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

During the three months ended June 30, 2014 we recognized revenues of $10,000 compared to $59,000, in the three months ended June 30, 2013. Our primary revenue source is from the sale of agriculture products grown by us. The sale of these products is highly seasonal and occurs primarily in the third and fourth quarters of the year.

Operating expenses totaled $1.1 million during the three months ended June 30, 2014 and $1.6 million during the three months ended June 30, 2013. The decrease of $471,000 primarily reflected reduced stock-based compensation, lower consulting fees and other expense savings based on a management initiative to reduce expenses. As a result, our net loss from operations was reduced from $1.6 million for the three months ended June 30, 2013 to $1.1 million for the three months ended June 30, 2014. We expect, however, that operating expenses will increase in future periods as we expand our business focus on irrigated farming and water.

Our non-operating expenses increased from $104,000 for the three months ended June 30, 2013 to $379,000 for the three months ended June 30, 2014. The increase of $275,000 was due primarily to an increase in interest expense, including amortization of debt discounts.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

During the six months ended June 30, 2014, we recognized revenues from continuing operations of $15,000 compared to $59,000 in revenues from continuing operations during the six months ended June 30, 2013. Our primary revenue source is from the sale of agriculture products grown by us. The sale of these products is highly seasonal and occurs primarily in the third and fourth quarters of the year.

Operating expenses from continuing operations totaled $2.1 million during the six months ended June 30, 2014 and $3.6 million during the six months ended June 30, 2013. The decrease of $1.5 million reflected (a) a $1.1 million decrease in non-cash expense of stock-based compensation and warrants from $1.4 million for the six months ended June 30, 2013 to $296,000 for the six months ended June 30, 2014 and (b) a $612,000 decrease in non-cash issuance of stock and options for services. Those reductions were offset by increases in operating expenses. As a result, our net loss from operations was reduced from $3.5 million for the six months ended June 30, 2013 to $2.1 million for the six months ended June 30, 2014. We expect, however, that operating expenses will increase in future periods as we expand our business focus on irrigated farming and water.

Our non-operating expenses increased from $300,000 for the six months ended June 30, 2013 to $703,000 for the six months ended June 30, 2014. The increase of $403,000 was due primarily to an increase in interest expense, including amortization of debt discounts.

Liquidity and Capital Resources

To date, we have funded our operations primarily from the following sources:

●	Equity proceeds through private placements of securities of Two Rivers Water & Farming Company and certain of its direct and indirect subsidiaries;

●	Revenue generated from operations;

●	Loans and lines of credit;

●	Sales of residential properties acquired through deed-in-lieu of foreclosure actions;

●	Sales of equity investments, and

●	Proceeds from the exercise of options.

As of June 30, 2014, we had no available line or letters of credit and do not intend to seek any such financing in the foreseeable future.

Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital. As of June 30, 2014, we had cash and cash equivalents of $1,868,000. Cash flow consumed by our operating activities totaled $2.0 million for the six months ended June 30, 2014, compared to operating activities consuming $2.0 million for the six months ended June 30, 2013. The increase in the cash consumed by our operating activities was largely due to the expansion of our farming operations.

Cash used in investing activities was $513,000 for the six months ended June 30, 2014, compared to use of cash of $1.4 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, we purchased equipment and built an expansion to our cooling warehouse at a total cost of $206,000 and we acquired land for $300,000. During the six months ended June 30, 2013, we purchased land and invested in water infrastructure through the expenditure of $1.3 million and we acquired equipment at a cost of $34,000.

Cash flows generated by our financing activities for the six months ended June 30, 2014, were $3.3 million compared to $3.1 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, we received gross proceeds of $3.4 million from sales of preferred units of our subsidiary TR Capital Partners, LLC and we incurred additional long term indebtedness of $275,000 in connection with land purchases. During that period, we applied $425,000 to pay amounts due under certain notes.

We currently expect that our cash expenditures will increase for the foreseeable future, as we seek to further expand our farmland business and to initiate operations of GrowCo. As a result, our existing cash and cash equivalents and other working capital may not be sufficient to meet all of the projected cash needs contemplated by our business strategies for the second half of 2014 and for 2015. To the extent our cash and cash equivalents and other working capital are insufficient to fund our planned activities, we may need to either slow our growth initiatives or raise additional funds through public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products. If additional funding is required, we cannot assure you that we will be able to effect an equity or debt financing on terms acceptable to us or at all.

Critical Accounting Policies

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

Revenue Recognition

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

Goodwill and Intangible Assets

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

In 2012, we acquired a produce business, which is considered an intangible asset and shown on our balance sheet as “Intangible assets, net.” Management evaluated the purchase price of $1.0 million and allocated this price to customer list, tradename and goodwill. For a detailed allocation, please see note 3 of the notes to consolidated financial statements included elsewhere in the Form 10-Q.

Impairment Policy

At least once every year, management examines all of our 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.

Inflation

We do not believe that inflation will have a material negative impact on our operations in the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and change in the market values of our real estate properties and water assets. Because we had no market risk sensitive instruments outstanding as of June 30, 2014, it was determined that there was no material market risk exposure to our consolidated financial position, results of operations, or cash flows as of such date. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, and due to the material weakness in our internal control over financial reporting described in our Management's Annual Report on Internal Control over Financial Reporting accompanying our Annual Report on Form 10-K for the year ended December 31, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures over financial reporting were not effective during reporting periods ended December 31, 2013 and June 30, 2014 as discussed below.

Changes in Internal Control over Financial Reporting and Remediation Efforts

During the six months ended June 30, 2014, no changes other than those in conjunction with certain remediation efforts described below, were identified to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

In the six months ended June 30, 2014, we continued to implement the following measures that we initiated in fiscal 2013 to improve our internal control over the financial reporting process.

●	We engaged an outside review team in 2014 to review and evaluate our on-going accounting processes, from the recording of transactions through the publishing of our financial statements.

●	We are seeking to hire a new senior level accountant who will be responsible for, among other things, overseeing our internal control processes.

We plan to perform another formal assessment of our internal control over financial reporting by no later than September 30, 2014. In addition, we will continue to monitor the effectiveness of our internal control over financial reporting and will seek to employ any additional tools and resources deemed necessary to ensure that our financial statements are fairly stated in all material respects.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

The risks described in Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2013, could materially and adversely affect our business, financial condition and results of operations. Those risk factors do not identify all risks that we face, and operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

ITEM 6. EXHIBITS

The following exhibits are being filed as part of this Form 10Q:

Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Principal Financial Officer pursuant to the Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 & FARMING COMPANY

Date: August 11, 2014	By:	/s/ Wayne Harding
		Wayne Harding
		Chief Financial Officer

EXHIBIT INDEX

Exhibit Number		Description
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Principal Financial Officer pursuant to the Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

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