UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2015

or

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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)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes oNo x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

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

There were 26,980,811 shares of common stock outstanding as of March 19, 2016.

Company References.  When we use “our company,” “we,” “our,” “us” and similar terms in this report, we mean Two Rivers Water & Farming Company and its subsidiaries.  The term “Parent Company” refers solely to Two Rivers Water & Farming Company and does not include subsidiaries.

Forward-Looking Statements.  This report, particularly the description of our business set forth in Item 1 and the discussion and analysis of our financial condition and operating results in Item 7, contains a number of “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act.  Any statements contained in this report that are not statements of historical fact should be considered to be forward-looking statements.  You can identify these forward-looking statements by use of the words “believes,” “expects,” anticipates,” plans,” “may,” “will,” “would,” “intends,” “estimates” and other similar expressions.  These forward-looking statements are based on current expectations, estimates, forecasts and projections about our company and the industries and markets in which we operate and on management’s beliefs and assumptions, and they should be read in conjunction with the information presented elsewhere in this report, including the discussion and analysis in Item 2 and the consolidated financial statements and notes provided pursuant to Item 7.  Although we believe our forward-looking statements are based on reasonable beliefs and assumptions, we cannot guarantee our future performance and a number of important risks and uncertainties could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. Those risks and uncertainties include the factors summarized in Item 1A as well as risks that emerge from time to time and are impossible for us to predict.  Forward-looking statements, like all of the statements in this report, speak only as of the date of filing of this report with the SEC, unless another date is indicated.  We disclaim any obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

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ITEM 1.

BUSINESS

Overview

Our core business acquires farmland with senior water rights and converts this farmland from traditional use of growing marginally profitable feed crops to growing fruit and vegetable crops that generate higher yield, revenue and operating margins.  We also deploy excess land and water to other associated business opportunities.  Currently, this expansion includes the development of 157 acres in Pueblo county Colorado into a greenhouse and processing facility to lease to cannabis growers.  

In the short-term, our business model is designed to provide us with increased profitability and cash flow that is enabling us to expand our operations by acquiring and developing additional irrigated farmland and associated water rights and infrastructure.  In the longer term, we believe our ability and willingness to pay a higher price for water will increase our access to water.  Potentially some of our water rights can be provision to municipalities to address their supply challenges.  We seek to concentrate our acquisitions on water rights and infrastructure that are, in part, owned by municipalities, which can alleviate and expedite the legal and political processes necessary for municipal consumers to obtain excess water.  

Our Farming, Greenhouse and Water Operations

Our current area of focus is the Arkansas River Basin, on the southern Front Range in Colorado.  The elevations in the area fall from 14,000 feet above sea level at the eastern crest of the Continental Divide to 4,500 feet above sea level in Pueblo, Colorado.  The Arkansas River is a tributary of the Mississippi River.

Since commencing operations in 2009, we have invested in acquiring and developing irrigated farmland and associated water rights and infrastructure.  Our principal investments to date have been the following:

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Additional Farmland:  From 2009 to 2011 we acquired 2,753 acres of farmland served by HCIC’s ditch system for purchase prices totaling $1.4 million in cash and seller carry back financing.  In 2012 we acquired 1,584 acres in Butte Valley for $509,000 in cash and seller carry back financing.  In 2015, we returned 187 acres of Butte Valley land back to the holder of seller carry back financing in exchange of forgiving $187,000 of debt and associated accrued interest.

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purchasing suites of water rights, including surface flow, augmentation and storage rights;

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refurbishing historical ditch systems and reservoirs to restore and upgrade their efficiency; and

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negotiating with governmental water authorities the agreements necessary to sustain production.

When redeveloping farmland, we seek to optimize product yield, water efficiencies and labor inputs by deploying state-of-the-art methods and equipment which includes:

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deep-plowing fields to loosen soil beds;

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laser-leveling planting areas to optimize water and nutrient absorption and minimize runoff;

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installing advanced irrigation facilities to increase water efficiencies; and

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applying both organic and non-organic fertilizers and soil conditioners to enhance plant growth.

Redevelopment generally takes two to three years to transform fallow farmland into fruit and vegetable crop production.

In Colorado, since the passing of recreational use of marijuana in 2012, the demand of marijuana has increased substantially.  Presently over 90% of Colorado marijuana is grown in converted warehouses.  Sophisticated growers understand that a warehouse production facility is not the most ideal for production.  This has given rise to a strong demand for greenhouse space for marijuana production.  Early estimates show a greenhouse can produce at least twice the amount of product at less than 50% of the cost compared to warehouse production.  However, there are only a limited number of counties that allow for new greenhouse construction.  New construction needs to be tied to water supply.  Pueblo County, where we have the majority of our land and associated water rights, allows for new greenhouse construction for marijuana growing.

Not only is location and water a key to be successful in marijuana production, but also the knowledge of greenhouse operations and how to grow marijuana.  In 2014, we selected a group knowledgeable in greenhouse operations and that have consulted with marijuana growers.  In May, 2014, we formed GrowCo, Inc., or GrowCo, which issued 20,000,000 shares of its common stock to the Parent Company.  On August 1, 2014 we announced that we were reserving 10,000,000 of the GrowCo shares to be distributed to holders of Common Stock as of four record dates (January 1, 2015; April 1, 2015; July 1, 2015 and October 1, 2015) after an effective registration statement is filed, which has not yet occured.  On each record date, we will recording a pending distribution of 2,500,000 GrowCo common shares on a pro rata basis to holders of Common Stock.

Under GrowCo, a separate Colorado limited liability company will own each greenhouse project.  On January 20, 2015, we announced that GrowCo Partners 1, LLC, or GCP1, completed a $4.4 million financing for the first greenhouse project, which consists of a 90,000 square foot greenhouse and 15,000 square foot processing and warehouse facility on 40 acres of land. GCP1’s greenhouse was partially occupied in September with lease revenue beginning September 1, 2015.  It is expected that a permanent certificate for full occupancy wil be granted in early April, 2016.

During the third quarter of 2015, GrowCo completed a $4.0 million private placement of GrowCo debt, with proceeds to be used to partially fund the second greenhouse and provide working capital.

In December 2015, GrowCo completed a $[5.5] million private placement of equity interests of GCP Super Units, LLC, which will invest directly in various assets of GrowCo, with proceeds to be used to complete the construction of the first greenhouse, partially fund the second greenhouse and provide working capital.  Our investment in GCP Super Units, LLC is reflected on our balance sheet as a non-controlling equity interest.

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As noted above, through our acquisition of DFP, and subsequent purchases we obtained 191.4 shares of the Bessemer Ditch Irrigation Company.  The 191.4 shares are comprised of 155.4 shares owned, 36 shares subject to a conservation easement (can only be used on a specific land for farming) and 72 shares leased from the Pueblo Board of Water Works, which lease expires in 2030. Bessemer Ditch Irrigation Company is a mutual ditch company that operates an irrigation canal on the main stem of the Arkansas River.  It has a headgate in the Pueblo Dam and delivers irrigation water.  We own and operate various senior water rights in the Arkansas River Basin, which we use or plan to use to irrigate our farmland.  This diversified portfolio is made up of a combination of direct flow rights and storage rights.

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The Orlando water rights include the senior-most direct flow water right on the Huerfano River, or #1 priority, along with the #9 priority and miscellaneous junior water rights.  The seniority of those water rights allowed the production of crops during the most recent drought.  The Orlando assets also include the Orlando reservoir, which is situated on the Huerfano branch of the Huerfano River and has a storage capacity of 3,100 acre-feet.

An acre-foot of water is the amount of water required to cover one acre to a depth of one foot.  An acre-foot of water contains 325,851 gallons, generally considered enough water to supply two average households for a year.  Annual irrigation in Southeastern Colorado, depending on the crops, consumes approximately three to six acre-feet of water per acre of crop.

To date our water operations have focused principally on acquiring and developing water rights to support our farming efforts, including the farming operations of the network of farmers who grow crops for us, and we have acquired our portfolio of water rights through the acquisition of farming assets.  By capturing water in reservoirs and releasing it later for irrigation purposes, we are able to retime the delivery of water throughout the irrigation season and ameliorate some of the inconsistencies of seasonal and annual water availability for the farmland we manage.

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We control 263.4 of the outstanding 17,980 shares of Bessemer Irrigation Company.  We own 155.4 of those shares without restriction, own an additional 36 shares subject to a conservation easement and lease 72 shares from Pueblo Board of Water Works.  The 191.4 shares we own represent 1.06% of the outstanding shares of Bessemer Irrigation Company and therefore provide us with 1.06% of consumptive use.  The 62,029 acre-feet is a 100-year average.  The 10-year average for consumptive use is 66,566 acre-feet, and the 5-year average is 57,362 acre-feet.

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

As part of our comprehensive water and farming system, we utilize storage reservoirs and ditches.  Reservoirs allow water owners to store their water and plan the water’s distribution throughout the growing season.  We currently own reservoirs associated with HCIC and Orlando, and we plan to develop additional reservoirs and augmentation ponds, also known as recharge ponds, in strategic locations in the Arkansas River watershed.  The development of storage reservoirs in the area will allow us to offer storage to other water users in the area.  Through water exchanges and other water-related transactions, the reservoirs can potentially increase and strengthen our existing water rights.

All of our reservoirs are used for irrigation in a similar manner to other reservoirs in the region, with the exception of Pueblo Reservoir, which was also constructed for flood control.  Direct flow rights generally are senior to most storage rights but typically do not divert early in the spring when storage rights fill.  The Arkansas River below Pueblo Reservoir operates a Winter Storage Program that re-allocates winter direct flow rights to storage in reservoirs from November 15 to March 15 each year.

Because our water rights and operating structures are located at succeeding elevations in the watershed, the system moves water supplies from point of diversion, through storage, to place of use primarily by means of gravity, making our more economical to operate than systems requiring energy to pump water for beneficial use.

In order to use these rights and structures most efficiently, we have planned and begun to implement a program of renovation and integration.  For example, we began construction of new outlet works for the 1905 Orlando Reservoir in November 2011.  The work was completed and successfully tested in February 2012, approximately a year after we acquired Orlando.  Also in February 2012, we commenced reconstruction of the diversion structure, which takes water from the Huerfano River for storage in the Orlando reservoir, and to irrigate our nearby farmland.  Additional water facility renovation projects are planned on a phased basis as necessary to provide reliable irrigation for our expanding farming operations.  Currently, the renovation and integration activity by us has been put on hold as we concentrate our efforts and resources expanding our greenhouse development, leasing and services activities.

We currently have the operable right to store 15,000 acre-feet of water within the Huerfano and Cucharas Rivers watershed in three separate reservoirs, subject to repair, or removal and rebuilding, limitations.  When our reservoirs on the Huerfano and Cucharas Rivers have been fully restored, we will have the operable capacity and legal right to

Corporate Information

The Parent Company is a Colorado corporation with principal executive offices at 2000 South Colorado Boulevard, Tower 1, Suite 3100, Denver, Colorado, and our telephone number at that address is (303) 222-1000. Our website address is www.2riverswater.com. The information on our website is not part of this report.

The Arkansas River Basin Roundtable has only a few IPPs to meet the water supply gap identified in its basin.  The most significant of the Arkansas Basin IPPs is the Southern Delivery System, an $800 million, 62-mile water supply pipeline and associated pumping plants currently under construction by a consortium of four regional water purveyors including Colorado Springs. These purveyors will use a portion of the capacity in the Southern Delivery System to transport water made available to each of them under their respective contracts with the U.S. Bureau of Reclamation.  The Southern Delivery System connects the U.S. Bureau of Reclamation’s Pueblo Reservoir on the Arkansas River, the point of delivery under the U.S. Bureau of Reclamation contracts, with the purveyors’ service areas

In order to address a portion of the identified gap between forecast supply and demand within the Arkansas Basin and to provide a substitute source of water for Front Range communities that are too reliant on depleted ground water aquifers, the design and planning for the Southern Delivery System anticipate that other water purveyors will subscribe for pipeline capacity to transport renewable water supplies to their service areas.  

Leasing and Providing Services to Cannabis Growers

These state laws are in conflict with the Federal Controlled Substances Act, which classifies marijuana as a Schedule I controlled substance and makes marijuana use and possession illegal on a national level.  The U.S. Supreme Court has ruled that the federal government has the right to regulate and criminalize marijuana, even for medical purposes, and thus federal law criminalizing the use of marijuana preempts state laws that legalize its use.  The Obama administration has made numerous statements indicating that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana.  However, the Obama administration could change its policy regarding

Available Information

We file reports with the SEC, which we make available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file it with the SEC.  You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

ITEM 1A.  RISK FACTORS

Risk Factors Relating to Our Business

Our farming and water operations require significant capital expenditures.

Farming is capital intensive.  On an annual basis, we could spend significant sums of money for additions to, or replacement of, land, land improvements, irrigation and farming equipment.  The refurbishment of our water assets is also capital intensive.  On an annual basis, we could spend significant sums of money for additions to, or replacement of, our facilities, reservoirs and equipment.  We must obtain funds for these capital projects from operations or capital raised.  We cannot provide assurance that any sources will be adequate or that the cost of funds will be at levels permitting us to earn a reasonable rate of return.

We were formed in December 2002.  We entered the real estate market in 2007 with a focus on residential mortgages.  In 2009 we began liquidation of its operations and assets in the residential mortgage market and entered into the water and farming businesses.  Because of drought conditions in southeastern Colorado and because our reservoirs and other water infrastructure were undergoing refurbishment, we did not produce significant crops or farm revenue during 2011.  The farmland irrigated by the Bessemer Ditch, which we acquired or leased in 2012,

We can give no assurance of success or profitability to investors.

Any default on mortgages or leases relating to our farmland could have a material impact on our farming business.

Our farmland, and related water rights thereon, is owned subject to mortgages.  If we default on a mortgage, we could lose the farmland and the water rights.  Some of our farmland is leased. A breach of a lease could result in the termination of the lease.  Some of our leases of farmland are at year-to-year terms.  Year-to-year terms are common in the farming industry and common in this geographical area.  Our inability to renew these leases would have a material impact on our ability to implement its business plan.

Dry weather or droughts may adversely affect the collection of our water and ability to grow crops.

Water to grow our crops is obtained from rainfall, surface runoff, stream flows and ground water.  In dry years or droughts, less water may be available to supply our farmlands and less water may be available for sale/lease, which could substantially impact revenues and cause losses.  The risk of water shortages is mitigated, however, by the seniority of our water rights and the availability of supplemental ground water to support consistent irrigation even during cyclical dry conditions.  Dry weather and drought contributed to decisions not to farm in 2011.  Such conditions will occur from time to time in the future and will affect the results of our operations.

The adequacy of our water supplies depends upon a variety of uncontrollable factors.  

An adequate water supply is necessary for our farming business to be profitable.  Our farming business is located where dry-farming is not profitable.  The adequacy of our water supplies varies from year to year depending upon a variety of factors, including:

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rainfall, runoff, flood control and availability of reservoir storage,

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availability of water in the Arkansas River watersheds,

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the amount of useable water stored in reservoirs and ground water basins,

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the amount of water used by our customers and others,

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water quality, and

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legal limitations on production, diversion, storage, conveyance and use.

Population growth and increases in the amount of water used in urban areas have caused increased stress on surface water supplies and ground water basins.

We obtain our water supply from the Arkansas, Cucharas and Huerfano Rivers.  Our water supply and storage may be subject to interruption or reduction if there is an interruption or reduction in water supplies available to us.  Our supply and storage business is dependent upon our ability to meet the requirements of the Colorado Water Engineer’s office regarding our water rights priorities.

Water shortages may:

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adversely affect our supply mix, for instance, causing increased reliance upon more expensive water sources, or

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adversely affect our operating costs, for instance, by increasing the cost to purchase or lease required water.

We are required to maintain water quality standards and are subject to regulatory and environmental risks.

We face the risk that our water supplies may be contaminated or polluted whether through our error or through actions by other agents or through acts of God.  In addition, normal farming practices, including the application of pesticides, herbicides and fertilizers, introduce pollutants to waterways through irrigation water runoff.  Improved detection technology, increasingly stringent regulatory requirements, and heightened consumer awareness of water quality contribute to an environment of increased risk with the possibility of increased operating costs.  We cannot assure you that in the future we will be able to reduce the amounts of contaminants in our water to acceptable levels.

Regulatory decisions may impact prospective revenues and earnings, affect the timing of the recognition of revenues and expenses, may overturn past decisions used in determining our revenues and expenses and could result in impairment of goodwill.  Management continually evaluates the assets, liabilities and revenues and provides for allowances and/or reserves as deemed necessary. 

We may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our farming or water businesses.

Regulatory agencies may also change their rules and policies, which may adversely affect our profitability and cash flows.  We may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our water businesses.  The water rights we control provide significant legal and pecuniary benefits.  Any changes in Colorado law that affects water rights, either in general or specific to our company, could likely have a material impact on us.

Because growing cycles are highly seasonal, our revenue, cash flows from operations and operating results are likely to fluctuate on a seasonal and quarterly basis.

The farming business is highly seasonal.  The seasonal nature of our operations results in significant fluctuations in our working capital during the growing and selling cycles.  As a result, operating activities during the second and third quarters use significant amounts of cash.  In contrast, operating activities for the fourth quarter typically generate cash as we harvest and sell our crops during that part of the year.  Also, the demand for water varies by season.  For instance, most water consumption for agriculture usage occurs during the third quarter of each year when weather tends to be hot and dry.  During wet weather, there is reduced demand for water delivered from our reservoirs.  We expect to experience significant variability in net sales, operating cash flows and net income on a quarterly basis.

Our ability to cultivate, husband and harvest our crop may be compromised by availability of labor and equipment.

When the crop is ready to harvest, we are dependent on seasonal labor and contractors for harvesting.  During harvest season, there is demand for such seasonal labor from many farming operations which will compete with our demand.  The availability of seasonal farm labor is also affected by uncertain national immigration policies and

Weather has a direct influence on the survival and yield of crops.  Adverse weather conditions include, but are not limited to, not enough rain, too much rain, high wind, tornados, hail, snow, lighting, thunderstorms, and other weather events.  These events could adversely impact our ability to grow and deliver crops.

We operate in areas subject to natural disasters.

We operate in an area that is prone to floods, droughts and other natural disasters.  While we plan to maintain insurance policies to help reduce our financial exposure, a significant seismic event in Southern Colorado, where our operations are concentrated, or other natural disasters in Colorado could adversely impact our ability to deliver labor to the crops, deliver crops to the marketplace, receive water and adversely affect our costs of operations and profitability.

Our earnings may be affected, to large extents, by volatility in the market value of our crops.

We intend to grow both exchange traded commodity crops and specialty crops for direct human consumption or use.  The pricing of these crops is determined between individual sellers and buyers.  These prices can vary widely, thereby directly impacting our revenue.  Although we attempt to mitigate crop price risk by generally making supply arrangements before we plant, there could be situations where our planned buyer fails and we would not find an alternative buyer during the viability of our perishable crops, in which case our revenue would be non-existent.

We may or may not maintain crop insurance.  We may decide not to maintain crop insurance based on the crop or the cost and availability of crop insurance.  Therefore, there could be some harvests that are destroyed, not covered by insurance, and nonetheless incur significant crop input expenses.

We operate in a highly competitive industry and potential competitors could duplicate our business model.

We are involved in a highly competitive industry where we compete with numerous other companies who offer similar facilities to lease to those we offer.  There is no aspect of our business, which is protected by patents, copyrights, trademarks, or trade names.  As a result, potential competitors could duplicate our business model with little effort. Some of our potential competitors may have significantly greater resources than we have, which may make it difficult for us to compete. There can be no assurance that we will be able to successfully compete against these other entities.

Our operations are geographically concentrated within Colorado.

Our operations are concentrated in Southeastern Colorado.  As a result, our financial results are subject to political impacts, regional weather conditions, available water supply, available labor supply, utility cost, regulatory risks, economic conditions and other factors affecting Colorado, our area of operation.  Southeastern Colorado has been hard hit by the on-going economic crisis.  Colorado is raising taxes in order to balance the state budget and jobs may

We have substantial competitors who have an advantage over us in resources and management.

Most of our competitors in both the farming industry and in the water resource management business have significantly greater financial resources, technical expertise and managerial capabilities than us and, consequently, we may be at a competitive disadvantage in identifying and developing or exploring suitable business opportunities and/or acquisitions.  Competitors’ resources could overwhelm our restricted efforts and adversely impact our operational performance.

The inability to attract and retain qualified employees could significantly harm our business.

The market for skilled executive officers and employees knowledgeable in agriculture and water rights is highly competitive and historically has experienced a high rate of turnover. Competition for quality officers and employees may lead to increased hiring and retention costs.

Our success will depend, to a large degree, on the expertise and experience of the members of our management team.

Our success in identifying investment opportunities and pursuing and managing such investments is, to a large degree, dependent upon the expertise and experience of the management team and their ability to attract and retain quality personnel.

Additional Risk Factors Relating to Our Greenhouse Businessand Tenant Support Services

Our business plan involves the acquisition and development of real estate properties and support services.  These properties will be used for our traditional irrigated farming business and the development of greenhouses, which will be leased to participants in the marijuana industry. The zoning and operational restrictions on marijuana industry participants may limit the availability of properties suitable for greenhouse development. While we have our Colorado property zoned for cannabis greenhouse production, this zoning can be revoked if construction has not began.  Further, we may be unable to find suitable properties once we expand outside of Colorado.

Our services offered to our tenant might not be allowed under state cannabis regulations.

While our legal counsel has advised us that we are proper in providing services to our tenant, and the services do not “touch the plant”, regulatory authorities might disagree with our position and not allow some, or all of the services, offered to our tenant.

We need capital to fund our greenhouse expansion.  While we have been successful in accessing capital for the first greenhouse, we do not know if future capital raising will be successful.  Our failure to obtain the capital, which we require for greenhouse expansion, may result in the slower implementation of our GrowCo business plan.

Continued marijuana industry operations are dependent upon continued legislative authorization of marijuana at the state level.  Any number of factors could slow or halt progress in this area.  Further, progress, while encouraging, is not assured.  While there is public support for legislative support of marijuana laws, numerous factors could impact the legislative process.  

Marijuana remains illegal under federal law.

Despite the development of a legal marijuana industry under the laws of certain states, these state laws legalizing medical and adult cannabis use are in conflict with the Federal Controlled Substances Act, which classifies marijuana as a Schedule-I controlled substance and makes marijuana use and possession illegal on a national level. The United States Supreme Court has ruled that it is the federal government that has the right to regulate and criminalize marijuana, even for medical purposes, and thus federal law criminalizing the use of marijuana preempts state laws that legalize its use.

Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.  Furthermore, it is possible that regulations may be enacted in the future that will be directly applicable to our leasing activities.  We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

We have leased our first greenhouse to a related party, which may result in actual or perceived conflicts of interest that could harm our operating results and reduce our stock price.

GrowCo Partners 1, LLC, a subsidiary of GrowCo, leases our only currently operating greenhouse and warehouse to Suncanna, LLC pursuant to a lease agreement dated April 1, 2015.  On February 25, 2016, Suncanna’s owner, who is not affiliated or associated with our company, entered into a definitive agreement to sell all of the outstanding equity interests  of Suncanna to RH Group, LLC, a newly formed entity of which John McKowen, the Chief Executive Officer of Two Rivers and GrowCo, holds a 60% membership interest.  Because the proposed sale of Suncanna’s equity would be deemed to be a transfer of rights to grow marijuana in Colorado, the closing of the sale is subject to state regulatory filings and hearings that currently are in process.

On March 18, 2016, Wayne Harding, the Chief Financial Officer of Two Rivers and GrowCo, was appointed as Chief Executive Officer of Suncanna.  Mr. Harding does not have any ownership in Suncanna. 

In light of Mr. McKowen's majority ownership and control of a potential acquirer of Suncanna and Mr. Harding’s position as Chief Executive Officer of Suncanna , we determined, as of February 25, 2016, that during and after fiscal year 2015 Suncanna should be regarded as a related party, and transactions with Suncanna should be classified as related party transactions, for financial statement reporting purposes.  

To the extent Messrs. McKowen and Harding continue to have relationships, or be otherwise involved with, the oversight, management and operation of both GrowCo and its affiliated companies, on the one hand, and Suncanna, on the other hand, they will face ongoing conflicts of interests whenever the interests of GrowCo and Suncanna differ for purposes of the existing lease agreement or otherwise.  Each of them may owe fiduciary duties to both our company and Suncanna in connection with transactions or circumstances in which our company and Suncanna have competing interests that may be resolved in a manner relatively unfavorable to our company.  As of the date of filing of the Form 10‑K, our company has not implemented additional controls or procedures targeted at identifying, controlling and minimizing these conflicts, and as a result, our business operations and results may suffer.  Moreover, market perception of actual or perceived conflicts of interest may reduce interest in our company and stock and may result in a less liquid market for our stock, all of which could reduce the value of our stock and make it more difficult for our stockholders to sell our shares.

Risk Factors Related to Ownership of Common Stock

There may be substantial dilution to our shareholders as a result of future decisions of our Board to issue shares without shareholder approval for cash, services, or acquisitions at prices solely determined by our Board.  

The regulation of penny stocks by SEC and FINRA may discourage the tradability of Common Stock.

The market for penny stocks has suffered in recent years from patterns of fraud and abuse, including:

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control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

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manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

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“boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;

•

excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

•

wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, causing investor losses.

We generally are not in a position to dictate the behavior of the market or of broker-dealers who participate in the market.

Rule 144 sales of Common Stock in the future may have a depressive effect on our stock price.

Our stock is thinly traded and as a result shareholders may be unable to sell at or near ask prices or at all.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  DESCRIPTION OF PROPERTIES

Our corporate headquarters are located in Denver, Colorado, where we lease 1,775 square feet of office space pursuant to a lease agreement that will expire in June 2018.  We believe that our current office facilities will be sufficient to meet our operational needs for the remainder of the existing lease term and that, upon the expiration of our current lease term, we will be able to extend our lease or lease suitable replacement office space as needed on acceptable, commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

The following table sets forth the range of high and low bid quotations for Common Stock during each quarter of 2015 and 2014. The quotations were obtained from information published by FINRA and reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not necessarily represent actual transactions.

Our transfer agent is Broadridge, 1717 Arch St., Suite 1300, Philadelphia, Pennsylvania  19103, phone:  (215) 553-5400.

Dividends on Common Stock

Penny Stock Regulation

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC.  Penny stocks generally are equity securities with a price of less than $5.00.  Excluded from the penny stock designation are securities listed on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange/system or sold to established customers or accredited investors.

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction, and the monthly account statements showing the market value of each penny stock held in the customer’s account.  In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer

Recent Sales of Unregistered Securities

During the year ended December 31, 2015, the Company had the following common stock transactions:

·

issued 130,833 shares to its independent board members for 2014 service;

·

issued 178,080 shares to holders of TR Capital for conversion into the Company shares;

·

issued 59,360 shares to a holders of F-2 Preferred Shares who converted into the Company shares;

·

issued 2,000 shares to a consultant for work performed in 2015; and

·

issued 86,000 shares to a previous board member from a prior RSU grant.

All of the sales of unregistered securities were made in reliance upon Regulation D and Section 4(2) of the Securities Act of 1933.

ITEM 6.  SELECTED FINANCIAL INFORMATION

Not applicable.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the other financial information included elsewhere in this report.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth under “Risk Factors” and elsewhere in this report.

Overview

In 2014, we formed our wholly owned subsidiary, GrowCo, Inc. (“GrowCo”).  GrowCo’s focus is to become the number one provider of greenhouses, related infrastructure, and services to growers of cannabis, in states where such activity is legal.  At this time, GrowCo does not “touch the plant”.   In 2015, our first greenhouse was constructed and partially finished.  Our related party tenant, Suncanna, began paying rent for the entire first greenhouse and warehouse effective September 1, 2015 and began partial occupancy in October, 2015.

Acquisitions

In 2014, we purchased an additional 73 acres of irrigated farmland, with associated water rights, in the Bessemer Ditch area.

In 2015, we returned 187 acres of land in Heurfano County, that was deemed not to be strategic to our efforts, in exchange for a cancellation of a note to the prior seller of $188,000 and accrued interest.  We purchased 41 acres and two St. Charles Mesa water taps for $197,000.

Financings

On December 31, 2013, we closed on $1,300,000 of short-term financing.  On February 1, 2014, this financing converted into preferred units of TR Capital.  In addition, TR Capital sold preferred units for $1,700,000 in cash on February 4, 2014 and sold additional preferred units for $3,000,000 in the quarter ending June 30, 2014.

For the year ending December 31, 2015, we completedthe following financing activities (net of offering costs):

·

$2,919,000 for the GCP1 offering (including the GCP1 bridge loan conversion);

·

$3,850,000 for the GrowCo Note offering; and

·

$3,828,000 for the GCP Super Units offering.

Related Party Transactions

On February 25, 2016, RH Group, LLC entered into a definitive agreement to purchase all of the equity interests  of Suncanna from the previous owner.  The closing of the proposed acquisition remains subject to certain regulatory filings and hearings in the State of Colorado regarding the transfer of rights to grow marijuana that would be deemed to result from the change in Suncanna’s ownership.  If the acquisition is completed, Suncanna would, among  other things, continue to lease a greenhouse and warehouse from GrowCo pursuant to the existing terms of the lease agreement dated as of April 1, 2015; GrowCo has waived any objection under the lease agreement attributable to the change in ownership of Suncanna.  

RH Group’s investors include key shareholders of Two Rivers who also hold securities of GrowCo.  John McKowen, the Chief Executive Officer of Two Rivers and GrowCo, owns a 60% membership interest in RH Group.  Two Rivers views RH Group as the new owner as beneficial to GrowCo due to RH Group’s willingness to fully honor the existing lease agreement and enter into a service agreement with GrowCo.  Because of Mr. McKowen's majority ownership and control of a potential acquirer of Suncanna, we determined, as of February 25, 2016, that during and after fiscal year 2015 Suncanna should be regarded as a related party, and transactions with Suncanna should be classified as related party transactions, for financial statement reporting purposes.

On March 18, 2016, the Chief Financial Officer of Two Rivers and GrowCo, Wayne Harding, was appointed as Chief Executive Officer of Suncanna.  Mr. Harding has no ownership interest in Suncanna.

The seller of DFP assets is now an employee of the Company and is owed $590,000 and was paid $35,000 in interest expense for the year ended December 31 2015.

Resources

We believe our existing cash, cash equivalents, our projected cash flowsfrom operating activities and anticipated refinancing (or extension) of the HCIC seller carry back debt will be sufficient to meet our anticipated cash needs for at least the next twelve months.  Our future working capital requirements will depend on many factors, including the rates of our farming growth, expansion of water projects and expansion of our greenhouse development. To the extent our cash, cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. We also may need to raise additional funds in the event we determine in the future to affect one or more acquisitions of businesses, technologies and products. If additional funding is required, we may not be able to affect an equity or debt financing on terms acceptable to us or at all.

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

·

·

·

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

Cash flow from operations has not historically been sufficient to sustain our operations without the above additional sources of capital.  As of December 31, 2015, we had cash and cash equivalents of $521,000.  Cash flow consumed by our operating activities totaled $3,161,000 for the year ended December 31, 2015 compared to operating activities consuming $4,372,000 for the year ended December 31, 2014.  The decrease of $1,211,000 is due to payment of preferred distributions of $1,458,000 in the form of non-cash in 2015 (compared to $588,000 for the year ended December 31, 2014) off-set by our expansion of GrowCo operations.

As of December 31, 2015, we had $1,673,000 in current assets and $13,135,000 in current liabilities. A large portion of the current liabilities ($6,752,000) is from the HCIC seller carry back notes, that are due June 30, 2016.  It is management’s intension to offering existing note holders the opportunity to extend their notes and for those note holders not wishing to extend, obtain financing to pay the notes.  The seller carry back notes have the HCIC ditch system as collateral, with an appraised value of $24,216,000.

Additionally another $4,000,000 of our GrowCo notes is classified incurrent liabilities.  The notes are due April 1, 2020; however the holders have the right request full payment of the principal balance with a 60 day notice anytime after April 1, 2016.  Management believes that none of the note holders will request the early principal payment option due to the high rate of interest and all note holders are also investors in other of the Company’s securities.

For cash used in investing activities, during the years ended December 31, 2015 and 2014 we used $5,878,000 in 2015 compared to $1,677,000 in 2014.  The increase of $4,201,000 were mostly due to the construction of GrowCo’s first and second greenhouse.  

Cash produced in financing activities was $7,626,000 for the year ended December 31, 2015 compared to a production of cash of $5,914,000 for the year ended December 31, 2014.During 2015, we converted $1,840,000 bridge loan financing to GrowCo Partners 1, LLC membership interest, collected an additional $1,227,000 to complete our GrowCo Partners 1, LLC offering and collected $3,828,000net from our GCP Super Unit, LLC offering.  We also generated a net of $3,933,000 net from our GrowCo Note offering.

In addition to the above, in 2012 we have entered into a five-year water lease arrangement with Pueblo Board of Water Works that calls for annual payments of $100,000 plus inflationary adjustments.  The annual payments can be escalated based upon the percentage increase, if any, over the previous year of the Board’s water rates for its general customers for treated water.  The lease is for up to 500 acre feet of water per year.  The lease establishes an appropriation of a water right for exchange from the Arkansas River main stream water to certain of our reservoirs and provides supplemental irrigation water for our farming operations through releases from those reservoirs.

Below is a table showing our antificpated principal payments due by periods.

Note:  (1) includes $4,000,000 of GrowCo notes that can be called anytime after April 1, 2016 with a 60 day notice by holder.

Critical Accounting Policies

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is presented beginning at page F-1 appearing immediately after “Signatures” below.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosures Controls and Procedures

Our management, comprised of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  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 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.  Our 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.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above.  Based on this evaluation, our management concluded that as of December 31, 2015, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control Over Financial Reporting

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

·

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

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and

Changes in Internal Control over Financial Reporting

None.

ITEM 9B. OTHER INFORMATION

None.

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

At December 31, 2015, our officers and directors were the individuals listed below:

There are no family relationships among any of the directors or executive officers.  Neither of the executive officers is related by blood, marriage or adoption to any of our other directors or executive officers.

Biographical Information

John R. McKowen has served as our Chief Executive Officer and Chairman of the Board since our founding in December 2002.  Mr. McKowen also served as President and Chief Executive Officer of Navidec, Inc. from 2003 to 2004.  Mr. McKowen was hired by Navidec, Inc. as a financial consultant in 1996 and was involved in the private, public and secondary financing of Navidec, Inc.  He served as a financial consultant to Navidec, Inc. until March 1999.  Mr. McKowen began his career in the financial services industry in 1978.  In 1984 Mr. McKowen began working as an independent consultant and has worked in that capacity for the last 23 years.  Mr. McKowen received a B.A. in economics from Metropolitan State College.

Wayne Harding has served as our Chief Financial Officer and Secretary since September 2009 and served as our controller from 2008 to September 2009.  He served as vice president business development of Rivet Software from 2004 to 2007.  From 2002 to 2004 Mr. Harding was the owner and President of Wayne Harding & Company PC, and from 2000 until 2002 he was director-business development of CPA2Biz.  Mr. Harding serves on the board of directors and head of the Audit Committee of AeroGrow International, a public company that manufactures and markets soil-free indoor garden products.  Mr. Harding holds an active CPA license in Colorado and holds the CGMA (Charter Global Management Accountant) designation.  Mr. Harding is past-President of the Colorado Society of CPAs.  He received his BS and MBA degrees from the University of Denver.

Dennis Channerhas served as a director, chair of the audit committee, and a member of the compensation, governance and nominating committee since October 2010.  Mr. Channer serves as our financial expert.  Mr. Channer has 36 years of financial and investment management experience.  Since 2001, Mr. Channer has been a Principal at Cornerstone Investment Advisors LLC, a financial planning, portfolio and trust management firm.  During late 1999 through 2000, he served as a Senior Consultant and Vice President of Portfolio Management Consultants, Inc. a provider of wealth management services.  Mr. Channer is also the former co-founder, Managing Director, and Chairman of the Board of Investors Independent Trust Company.  His background includes experience as a Certified Financial Planner, Registered Investment Advisor, Certified Public Accountant and Controller.

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC.  Officers and directors are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.  Based on our review of copies of such reports received, and representations from certain reporting persons, we believe that, during the fiscal year ended December 31, 2015, all of the Section 16(a) filing requirements applicable to our officers and directors were filed in compliance with all applicable requirements.

Executive Compensation

Summary Compensation Table for 2015

The following table sets forth certain information concerning compensation paid to each of the individuals who served as executive officers during 2015:

SUMMARY COMPENSATION TABLE

Grants and Issuance of Plan-Based Awards for 2015 and 2014

No plan-based awards were granted to our executive officers during 2015.   For the year ended December 31, 2014, the Company issued through prior RSU grants, 600,000 common shares to John R. McKowen and 166,667 common shares to Wayne Harding, that were vested in prior years.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth certain information as to unexercised restricted stock units held on December 31, 2015 by the named executive officers.

Option Exercises and Stock Vested in 2015

No shares of Common Stock vested during 2015 under RSUs held by our executive officers.

We entered into employment agreements with each of John McKowen and Wayne Harding effective as of January 1, 2011.  Each of these employment agreements renews automatically for successive one-year terms until either party delivers notice of termination within 30 days of the expiration of the then-current term.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE

Director Compensation

Since October 1, 2012, each outside director receives $2,000 per calendar quarter and $1,000 for each meeting attended in person.  For the first year of service, an outside director receives 5,000 shares of Common Stock per calendar quarter.  After a full year of service, an outside director receives 7,500 shares of Common Stock per calendar quarter.  The chairs of the audit committee and the compensation, governance and nominating committee receive an additional 2,500 shares of Common Stock per calendar quarter.

Code of Conduct

We have adopted a written code of ethics that applies to directors, officers and employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.  You can access our code of conduct for our board in the “Investor” section of our website located at www.2riverswater.com/investors.  Employees’ (including officers and management) code of conduct is detailed in our employee handbook, which all employees must sign. We post on our website all disclosures required by law concerning any amendments to, or waivers from, any provision of the code.  Our website and its contents are not incorporated into this report.

Board Leadership Structure

Director Nomination Process

Stockholders may recommend individuals to the compensation, governance and nominating committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and a statement as to whether the stockholder or group of stockholders making the recommendation has beneficially owned more than five percent of the Common Stock for at least a year as of the date such recommendation is made, to the compensation, governance and nominating committee in care of Two Rivers Water & Farming Company, 2000 South Colorado Boulevard, Tower 1, Suite 3100, Denver, Colorado 80222, Attention: Secretary.  Assuming that appropriate biographical and background material has been provided on a timely basis, the compensation, governance and nominating committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.

Under procedures approved by a majority of our independent directors, communications are forwarded to all directors if they relate to important substantive matters and include suggestions or comments that the chief financial officer considers to be important for the directors to know.  In general, communications relating to corporate governance and corporate strategy are more likely to be forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we receive repetitive or duplicative communications.

Compensation Committee Interlocks and Insider Participation

The members of the compensation, governance and nominating committee are Gregg Campbell and Dennis Channer.  Neither Mr. Campbell nor Mr. Channer has ever been an officer or employee of our company or any subsidiary of ours or had any relationship with us during 2015 requiring disclosure under Item 404 of Regulation S-K of the SEC.

Neither of the executive officers has served as a director or member of the compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a member of our board of directors or our compensation committee.

Director Attendance at Board and Shareholder Meetings

The board of directors met formally three times during 2015, either in person or by teleconference. Each incumbent director attended at least 75% of the meetings of the board held in 2015 during the period in which such person was a director.

We do not have a policy regarding director attendance at our annual meetings of shareholders.  Messrs. Channer, Stroh, and Campbell attended our annual meeting of shareholders held on September 15, 2015.

Board Committees

Audit Committee

The committee’s responsibilities include:

·

appointing, approving the compensation of, and assessing the independence of our registered public accounting firm;

·

overseeing the work of the registered public accounting firm, including through the receipt and consideration of certain reports from such firm;

·

reviewing and discussing our annual and quarterly financial statements and related disclosures with management and the registered public accounting firm;

·

monitoring our internal control over financial reporting, disclosure controls and procedures, and code of ethics, and overseeing risk management;

·

meeting independently with our registered public accounting firm and management; and

·

reviewing and approving or ratifying any related-person transactions.

The audit committee met four times during 2015, either in person or by teleconference.  During 2015, each member of the audit committee attended at least 100% of the meetings of the committee held during the period in which such director was a member of the audit committee.

Compensation, Governance and Nominating Committee

Members of the compensation, governance and nominating committee are Gregg Campbell and Dennis Channer.  Mr. Campbell chairs the committee.

The compensation, governance and nominating committee also is responsible for approving employment agreements with executives.  

The Compensation, Governance and Nominating Committee met once during 2015.

Audit Committee Report

AUDIT COMMITTEE

Gregg Campbell

Dennis Channer

The material in this audit committee report is not "soliciting material," is not deemed "filed" with the SEC, and is not to be incorporated by reference in any filing by the Parent Company under the Securities Act or the Securities

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Ÿ

Ÿ

*

Less than 1%.

For purposes of the table above, the address of each of our directors and executive officers is in care of Two Rivers Water & Farming Company, 2000 South Colorado Boulevard, Tower 1, Suite 3100, Denver, Colorado 80222.

The shares of Common Stock beneficially owned by Mr. McKowen include 1,880,948 shares subject to RSUs.

The shares of Common Stock beneficially owned by Mr. Harding include 6,666 shares owned by an individual retirement account for the benefit of Mr. Harding's spouse.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Two Rivers Water & Farming Company

Denver, Colorado

We have audited the accompanying consolidated balance sheets of Two Rivers Water & Farming Company (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended. Two Rivers Water & Farming Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Two Rivers Water & Farming Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

Two Rivers Water & Farming Company

2015 Financials

Page F-2

TWO RIVERS WATER & FARMING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except for number of shares)

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

Two Rivers Water & Farming Company

2015 Financials

Page F-3

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for Loss per Share)

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

Two Rivers Water & Farming Company

2015 Financials

Page F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)