UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☑☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 20172018
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 0-8814
PURE CYCLE CORPORATION |
|
(Exact name of registrant as specified in its charter) |
PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
Colorado | | 84-0705083 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
34501 E. Quincy Avenue, Bldg. 34, Box 10, Watkins, CO | | 80137 |
(Address of principal executive offices) | | (Zip Code) |
(303) 292 – 3456 |
(Registrant’s telephone number, including area code) |
|
|
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | ☐
| Accelerated filer | ☑ ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐
|
(Do not check if a smaller reporting company) | Smaller reporting company ☐ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 06, 2017:6, 2018:
Common stock, 1/3 of $.01 par value
| 23,764,098 | 23,754,098 |
(Class) | | (Number(Number of Shares) |
PURE CYCLE CORPORATION
INDEX TO MAY 31,
20162018 FORM 10-Q
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Item 4. Controls and Procedures | 32 |
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PART II. OTHER INFORMATION | 33 |
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SIGNATURES | 34 |
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PART I – FINANCIAL INFORMATION
Item 1.Consolidated Financial StatementsItem 1. | Consolidated Financial Statements |
PURE CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS: | | May 31, 2018 | | | August 31, 2017 | |
| | (unaudited) | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 2,876,152 | | | $ | 5,575,823 | |
Short-term investments | | | 17,005,914 | | | | 20,055,345 | |
Trade accounts receivable | | | 1,218,251 | | | | 663,762 | |
Notes receivable - related parties, including accrued interest, current | | | - | | | | 215,504 | |
Notes receivable, current | | | 173,249 | | | | - | |
Prepaid expenses and other current assets | | | 1,340,409 | | | | 503,100 | |
Inventories | | | 2,074,543 | | | | - | |
Assets of discontinued operations, net | | | 86,789 | | | | 110,748 | |
Total current assets | | | 24,775,307 | | | | 27,124,282 | |
| | | | | | | | |
Long-term investments | | | 189,774 | | | | 187,975 | |
Investments in water and water systems, net | | | 35,609,275 | | | | 34,575,713 | |
Land and mineral interests | | | 6,075,834 | | | | 6,248,371 | |
Notes receivable - related parties, including accrued interest | | | 2,375,352 | | | | 776,364 | |
Other assets | | | 654,027 | | | | 424,226 | |
Assets of discontinued operations held for sale | | | 450,641 | | | | 450,641 | |
Total assets | | $ | 70,130,210 | | | $ | 69,787,572 | |
| | | | | | | | |
LIABILITIES: | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 269,025 | | | $ | 492,410 | |
Accrued liabilities | | | 379,336 | | | | 380,852 | |
Deferred revenues, current | | | - | | | | 55,800 | |
Deferred oil and gas lease payment, current | | | 55,733 | | | | - | |
Liabilities of discontinued operations | | | 5,559 | | | | 11,165 | |
Total current liabilities | | | 709,653 | | | | 940,227 | |
| | | | | | | | |
Deferred revenues, less current portion | | | - | | | | 999,688 | |
Deferred oil and gas lease payment, less current portion | | | 74,311 | | | | - | |
Participating Interests in Export Water Supply | | | 339,406 | | | | 341,558 | |
Total liabilities | | | 1,123,370 | | | | 2,281,473 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock: | | | | | | | | |
Series B - par value $.001 per share, 25 million shares authorized; | | | | | | | | |
432,513 shares issued and outstanding | | | | | | | | |
(liquidation preference of $432,513) | | | 433 | | | | 433 | |
Common stock: | | | | | | | | |
Par value 1/3 of $.01 per share, 40 million shares authorized; | | | | | | | | |
23,764,098 and 23,754,098 shares outstanding, respectively | | | 79,218 | | | | 79,185 | |
Additional paid-in capital | | | 171,747,662 | | | | 171,431,486 | |
Accumulated other comprehensive income (loss) | | | 60,225 | | | | (11,105 | ) |
Accumulated deficit | | | (102,880,698 | ) | | | (103,993,900 | ) |
Total shareholders’ equity | | | 69,006,840 | | | | 67,506,099 | |
Total liabilities and shareholders’ equity | | $ | 70,130,210 | | | $ | 69,787,572 | |
ASSETS: | | |
Current assets: | | |
Cash and cash equivalents | $5,747,551 | $4,697,288 |
Short-term investments | 20,232,935 | 23,176,450 |
Trade accounts receivable | 61,554 | 181,006 |
Prepaid expenses | 515,445 | 350,819 |
Assets of discontinued operations | 560,543 | 680,287 |
Total current assets | 27,118,028 | 29,085,850 |
| | |
Long-term investments | 1,430,177 | 6,853,276 |
Investments in water and water systems, net | 34,343,476 | 28,321,926 |
Land and mineral interests | 5,618,800 | 5,345,800 |
Notes receivable - related parties, including accrued interest | 905,503 | 800,369 |
Other assets | 451,072 | 472,393 |
Total assets | $69,867,056 | $70,879,614 |
| | |
LIABILITIES: | | |
Current liabilities: | | |
Accounts payable | $445,485 | $160,390 |
Accrued liabilities | 70,807 | 242,624 |
Deferred revenues | 55,800 | 55,800 |
Deferred oil and gas lease payment | 1,000 | 19,000 |
Liabilities of discontinued operations | 8,646 | 4,394 |
Total current liabilities | 581,738 | 482,208 |
| | |
Deferred revenues, less current portion | 1,013,639 | 1,055,491 |
Participating Interests in Export Water Supply | 341,864 | 343,966 |
Total liabilities | 1,937,241 | 1,881,665 |
| | |
Commitments and contingencies | | |
| | |
SHAREHOLDERS’ EQUITY: | | |
Preferred stock: | | |
Series B - par value $.001 per share, 25 million shares authorized; | | |
432,513 shares issued and outstanding | | |
(liquidation preference of $432,513) | 433 | 433 |
Common stock: | | |
Par value 1/3 of $.01 per share, 40 million shares authorized; | | |
23,754,098 and 23,754,098 shares outstanding, respectively | 79,185 | 79,185 |
Additional paid-in capital | 171,366,275 | 171,198,241 |
Accumulated other comprehensive (loss) income | (23,366) | 3,122 |
Accumulated deficit | (103,492,712) | (102,283,032) |
Total shareholders' equity | 67,929,815 | 68,997,949 |
Total liabilities and shareholders’ equity | $69,867,056 | $70,879,614 |
See accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Revenues: | | | | | | | | | | | | |
Metered water usage | | $ | 1,162,570 | | | $ | 47,695 | | | $ | 2,888,913 | | | $ | 379,462 | |
Wastewater treatment fees | | | 11,675 | | | | 6,967 | | | | 32,157 | | | | 30,516 | |
Special facility funding recognized | | | - | | | | 10,377 | | | | - | | | | 31,131 | |
Water tap fees recognized | | | - | | | | 46,978 | | | | 49,948 | | | | 54,125 | |
Other | | | 37,874 | | | | 21,991 | | | | 95,893 | | | | 74,952 | |
Total revenues | | | 1,212,119 | | | | 134,008 | | | | 3,066,911 | | | | 570,186 | |
| | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | |
Water service operations | | | (418,280 | ) | | | (76,878 | ) | | | (906,899 | ) | | | (234,444 | ) |
Wastewater service operations | | | (6,632 | ) | | | (7,509 | ) | | | (21,303 | ) | | | (22,478 | ) |
Depletion and depreciation | | | (79,772 | ) | | | (69,013 | ) | | | (179,913 | ) | | | (178,394 | ) |
Other | | | (24,243 | ) | | | (13,649 | ) | | | (64,822 | ) | | | (45,921 | ) |
Total cost of revenues | | | (528,927 | ) | | | (167,049 | ) | | | (1,172,937 | ) | | | (481,237 | ) |
Gross profit (loss) | | | 683,192 | | | | (33,041 | ) | | | 1,893,974 | | | | 88,949 | |
| | | | | | | | | | | | | | | | |
General and administrative expenses | | | (635,502 | ) | | | (518,625 | ) | | | (1,816,110 | ) | | | (1,411,410 | ) |
Depreciation | | | (135,488 | ) | | | (79,388 | ) | | | (380,065 | ) | | | (227,643 | ) |
Operating loss | | | (87,798 | ) | | | (631,054 | ) | | | (302,201 | ) | | | (1,550,104 | ) |
| | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | |
Oil and gas lease income, net | | | 13,933 | | | | 6,000 | | | | 37,156 | | | | 17,265 | |
Oil and gas royalty income, net | | | 61,113 | | | | 24,935 | | | | 152,653 | | | | 164,338 | |
Interest income | | | 69,027 | | | | 59,578 | | | | 176,001 | | | | 199,242 | |
Other | | | (2,643 | ) | | | (2,600 | ) | | | (7,846 | ) | | | (7,814 | ) |
Net income (loss) from continuing operations | | | 53,632 | | | | (543,141 | ) | | | 55,763 | | | | (1,177,073 | ) |
Income (loss) from discontinued operations, net of taxes | | | 969 | | | | (11,275 | ) | | | 2,390 | | | | (32,607 | ) |
Net income (loss) | | $ | 54,601 | | | $ | (554,416 | ) | | $ | 58,153 | | | $ | (1,209,680 | ) |
Unrealized holding gains (losses) | | | 40,613 | | | | 8,404 | | | | 71,330 | | | | (26,488 | ) |
Total comprehensive income (loss) | | $ | 95,214 | | | $ | (546,012 | ) | | $ | 129,483 | | | $ | (1,236,168 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted net income (loss) per common share | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | * | | | $ | (0.02 | ) | | | * | | | $ | (0.05 | ) |
Income (loss) from discontinued operations | | | * | | | | * | | | | * | | | | * | |
Net income (loss) | | | * | | | $ | (0.02 | ) | | | * | | | $ | (0.05 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding–basic | | | 23,764,098 | | | | 23,754,098 | | | | 23,759,654 | | | | 23,754,098 | |
Weighted average common shares outstanding–diluted | | | 23,955,046 | | | | 23,754,098 | | | | 23,913,863 | | | | 23,754,098 | |
| Three Months Ended May 31, | Nine Months Ended May 31, |
| | | | |
Revenues: | | | | |
Metered water usage | $47,695 | $35,659 | $379,462 | $119,832 |
Wastewater treatment fees | 6,967 | 10,537 | 30,516 | 31,540 |
Special facility funding recognized | 10,377 | 10,377 | 31,131 | 31,131 |
Water tap fees recognized | 46,978 | 3,574 | 54,125 | 10,721 |
Other | 21,991 | 40,705 | 74,952 | 109,980 |
Total revenues | 134,008 | 100,852 | 570,186 | 303,204 |
| | | | |
Expenses: | | | | |
Water service operations | (76,878) | (65,184) | (234,444) | (190,976) |
Wastewater service operations | (7,509) | (7,286) | (22,478) | (20,555) |
Depletion and depreciation | (69,013) | (41,604) | (178,394) | (124,834) |
Other | (13,649) | (20,763) | (45,921) | (51,373) |
Total cost of revenues | (167,049) | (134,837) | (481,237) | (387,738) |
Gross (loss) profit | (33,041) | (33,985) | 88,949 | (84,534) |
| | | | |
General and administrative expenses | (518,625) | (431,737) | (1,411,410) | (1,294,585) |
Depreciation | (79,388) | (67,172) | (227,643) | (182,999) |
Operating loss | (631,054) | (532,894) | (1,550,104) | (1,562,118) |
| | | | |
Other income (expense): | | | | |
Oil and gas lease income, net | 6,000 | 31,905 | 17,265 | 354,765 |
Oil and gas royalty income, net | 24,935 | 76,400 | 164,338 | 271,002 |
Interest income | 59,578 | 66,253 | 199,242 | 175,356 |
Other | (2,600) | (2,671) | (7,814) | (8,004) |
Net loss from continuing operations | (543,141) | (361,007) | (1,177,073) | (768,999) |
Loss from discontinued operations, net of taxes | (11,275) | (61,263) | (32,607) | (21,511) |
Net loss | $(554,416)
| $(422,270) | $(1,209,680)
| $(790,510) |
Unrealized holding gains (losses) | 8,404 | (35,517) | (26,488) | (23,335) |
Total comprehensive loss | $(546,012) | $(457,787) | $(1,236,168) | $(813,845) |
| | | | |
Basic and diluted net income (loss) per common share – | | | | |
Loss from continuing operations | $(0.02) | $(0.02) | $(0.05) | $(0.03) |
(Loss) earnings from discontinued operations | * | * | * | * |
Net loss | $(0.02) | $(0.02) | $(0.05) | $(0.03) |
| | | | |
Weighted average common shares outstanding – basic | 23,754,098 | 23,754,098 | 23,754,098 | 23,795,627 |
Weighted average common shares outstanding – diluted | 23,754,098 | 23,754,098 | 23,754,098 | 23,795,627 |
* Amount is less than $.01 per share
See accompanying Notes to Consolidated Financial Statements
2
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine months ended May 31, 20172018
(unaudited)
| | | | | | | | |
| | | | | | | | |
| | | | | | |
| | | | | | | | |
August 31, 2016 balance: | 432,513 | $433 | 23,754,098 | $79,185 | $171,198,241 | $3,122 | $(102,283,032) | $68,997,949 |
Share-based compensation | – | – | – | – | 168,034 | – | – | 168,034 |
Net loss | – | – | – | – | – | – | (1,209,680) | (1,209,680) |
Unrealized holding loss on investments | – | – | – | – | – | (26,488) | – | (26,488) |
May 31, 2017 balance: | 432,513 | $433 | 23,754,098 | $79,185 | $171,366,275 | $(23,366) | $(103,492,712) | $67,929,815 |
See accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended May 31, |
| | |
Cash flows from operating activities: | | |
Net loss | $(1,209,680) | $(790,510) |
Adjustments to reconcile net loss to net cash | | |
used in operating activities: | | |
Depreciation and depletion | 405,167 | 307,834 |
Investment in Well Enhancement Recover Systems, LLC | 7,652 | 8,004 |
Stock-based compensation expense | 168,034 | 167,061 |
Interest income and other non-cash items | (26,641) | (37,299) |
Interest added to receivable from related parties | (18,316) | (22,503) |
Changes in operating assets and liabilities: | | |
Trade accounts receivable | 119,452 | 248,731 |
Prepaid expenses | (164,626) | (145,826) |
Notes receivable - related parties | (86,818) | (26,483) |
Accounts payable and accrued liabilities | (90,322) | (486,170) |
Income taxes | - | (292,729) |
Deferred revenues | (41,852) | (41,852) |
Deferred oil and gas lease payment | (18,000) | (354,765) |
Net cash used in operating activities from continuing operations | (955,950) | (1,466,507) |
Net cash provided by operating activities from discontinued operations | 116,706 | 1,251,527 |
Net cash used in operating activities | (839,244) | (214,980) |
| | |
Cash flows from investing activities: | | |
Sale (purchase) of short-term investments | 8,366,614 | (23,142,484) |
Purchase of long-term investments | - | (7,026,424) |
Investments in Sky Ranch pipeline | (4,101,010) | |
Investments in Sky Ranch land development | (378,600) | |
Investments in water, water systems, and land | (1,918,153) | (695,746) |
Purchase of property and equipment | (77,242) | (441,768) |
Net cash provided by (used in) investing activities from continuing operations | 1,891,609 | (31,306,422) |
Net cash used in investing activities from discontinued operations | - | (451,347) |
Net cash provided by (used in) investing activities | 1,891,609 | (31,757,769) |
| | |
Cash flows from financing activities: | | |
Payments to contingent liability holders | (2,102) | (1,629) |
Net cash used in financing activities from continuing operations | (2,102) | (1,629) |
Net cash provided by financing activities from discontinued operations | - | - |
Net cash used in financing activities | (2,102) | (1,629) |
Net change in cash and cash equivalents | 1,050,263 | (31,974,378) |
Cash and cash equivalents – beginning of period | 4,697,288 | 37,089,041 |
Cash and cash equivalents – end of period | $5,747,551 | $5,114,663 |
| | |
SUPPLEMENTAL DISCLSOURES OF NON-CASH ACTIVITIES | | |
Investment in Sky Ranch pipeline through accounts payable | $210,889 | $- |
Retirement of collateral stock | $- | $1,407,000 |
| | Preferred Stock | | | Common Stock | | | Additional Paid-in Capital | | | Accumulated Other Comprehensive (Loss) Income | | | Accumulated Deficit | | | Total | |
| | Shares | | | Amount | | | Shares | | | Amount |
August 31, 2017 balance: | | | 432,513 | | | $ | 433 | | | | 23,754,098 | | | $ | 79,185 | | | $ | 171,431,486 | | | $ | (11,105 | ) | | $ | (103,993,900 | ) | | $ | 67,506,099 | |
Stock option exercises | | | | | | | | | | | 10,000 | | | $ | 33 | | | $ | 74,967 | | | | | | | | | | | | 75,000 | |
Share-based compensation | | | – | | | | – | | | | – | | | | – | | | | 241,209 | | | | – | | | | – | | | | 241,209 | |
Adoption of accounting standards | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,055,049 | | | | 1,055,049 | |
Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 58,153 | | | | 58,153 | |
Unrealized holding gain on investments | | | – | | | | – | | | | – | | | | – | | | | – | | | | 71,330 | | | | – | | | | 71,330 | |
May 31, 2018 balance: | | | 432,513 | | | $ | 433 | | | | 23,764,098 | | | $ | 79,218 | | | $ | 171,747,662 | | | $ | 60,225 | | | $ | (102,880,698 | ) | | $ | 69,006,840 | |
See accompanying Notes to Consolidated Financial Statements
Discontinued Operations Balance Sheet | |
| | | | | | |
| | May 31, 2018 | | | August 31, 2017 | |
Assets: | | | | | | |
Trade accounts receivable | | $ | 86,800 | | | $ | 110,700 | |
Land held for sale (*) | | | 450,600 | | | | 450,600 | |
Total assets | | $ | 537,400 | | | $ | 561,300 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Accrued liabilities | | $ | 5,600 | | | $ | 11,200 | |
Total liabilities | | $ | 5,600 | | | $ | 11,200 | |
(*) Land Held for Sale.During the fiscal quarter ended November 30, 2015, the Company purchased three farms totaling 700 acres for approximately $450,000. The Company acquired a total of 700 acres.$450,600. The farms were acquired in order to correct dry-up covenant issues related to water only farms in order to obtain the release of the escrow funds related to the Company’s farm sale to Arkansas River Farms, LLC. The Company intends to sell the farms withinin due course and has classified the next fiscal year.farms as long-term assets.
Income (Loss) per Common Share
Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period. Common stock options and warrants aggregating 470,600535,500 and 338,100470,600 common share equivalents were outstanding as of May 31, 20172018 and 2016,2017, respectively, and have been included in the calculation of diluted net income per common share but excluded from the calculation of loss per common share as their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its consolidated financial statements and ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In MayFebruary 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 provides for amendments to ASU No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 842). , amending theASU 2016‑02 provides guidance on transition, collectability, noncash considerationthe recognition, measurement, presentation, and disclosure of leases. The new standard supersedes the presentation of salespresent GAAP standard on leases and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contractrequires substantially all leases to be considered completed at transition, all (or substantially all) ofreported on the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability thresholdbalance sheet as right-of-use assets and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.lease obligations. This standard is effective for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact of ASU 2016-12.2016-02.
In AprilJanuary 2016, the FASB issued ASU No. 2016-10, 2016-01,Revenue from Contracts with Customers Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 606): Identifying Performance Obligations and Licensing825). ASU 2016-10 providesNo. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for amendments tocertain financial liabilities measured at fair value. ASU No. 2014-09, Revenue from Contracts with Customers, reducing2016-01 requires the complexity when applying the guidance for identifying performance obligations and improving the operability and understandabilitychange in fair value of the license implementation guidance. The Company is currently assessing the impact of ASU 2016-10.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, clarifying the implementation guidance on principal versus agent considerations in the new revenue recognition standard. Specifically, ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company is currently assessing the impact of ASU 2016-08.
In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expectsmany equity investments to be entitled to the exchange for those goods or services. ASU 2014-09recognized in net income. This standard is effective for the Company September 1, 2018interim and annual periods beginning after December 15, 2017 with early adoption permitted for the Company on September 1, 2017.permitted. The Company does not expectadopted ASU No. 2016-01 in its third quarter of 2018 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, the adoption of ASU 2014-09 toNo. 2016-01 did not have a material impact on its wholesale water and wastewater and consulting fees as the underlying contracts with these customers are relatively straightforward. The Company is currently assessing the impact of ASU 2014-09 on its water and wastewater tap and construction fees. The Company anticipates this assessment to be completed in sufficient time to allow for an efficient adoption of the standard.consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the presentation and disclosure requirements for discontinued operations. The update was adopted by the Company in fiscal year 2016.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity'sEntity’s Ability to Continue as a Going Concern. ASU 2014-15 describes how an entity'sentity’s management should assess, considering both quantitative and qualitative factors, whether there are conditions and events that raise substantial doubt about an entity'sentity’s ability to continue as a going concern within one year after the date that the financial statements are issued, which represents a change from the existing literature that requires consideration about an entity'sentity’s ability to continue as a going concern within one year after the balance sheet date. The standard iswas effective for the Company on September 1, 2017. The Company is assessing the impact of ASU 2014-15, but it does not expect the adoption of ASU 2014-15 todid not have a material impact on itsthe Company’s financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The standard supersedes ASU No. 2009-13, Revenue Recognition (Topic 605) (“ASC 605”), and requires the use of more estimates and judgments than do the present standards. It also requires additional disclosures. The Company has completed its review of the adoption of ASU 2014‑09 and the related impact on each of the Company’s revenue streams (water and wastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and oil and gas revenues). Upon completion of the Company’s evaluation of the standard, the Company determined to early adopt the new revenue recognition standard beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. The Company concluded that the adoption did have a material impact on the Company’s financial statements.
The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of the changes made to the Company’s consolidated September 1, 2017 balance sheet for the adoption of ASU 2014-09 were as follows:
| | Balance at August 31, 2017 | | | Adjustments Due to ASU 2014-09 | | | Balance at September 1, 2017 | |
Balance Sheet | | | | | | | | | |
Assets | | | | | | | | | |
Deferred tax assets (Deferred revenue) | | $ | 316,400 | | | $ | (316,400 | ) | | $ | - | |
Deferred tax assets - valuation allowance (Deferred revenue) | | | (316,400 | ) | | | 316,400 | | | | - | |
Liabilities | | | | | | | | | | | | |
Deferred revenues, current | | $ | 55,800 | | | $ | (55,800 | ) | | $ | - | |
Deferred revenues, less current portion | | | 999,249 | | | | (999,249 | ) | | | - | |
Equity | | | | | | | | | | | | |
Accumulated deficit | | $ | (103,993,900 | ) | | $ | 1,055,049 | | | $ | (102,938,851 | ) |
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s consolidated statements of operations and comprehensive income (loss) and balance sheet was as follows:
For the Nine Months Ended May 31, 2018 | |
| | As Reported | | | Amounts that would have been reported under ASC 605 | | | Effect of Change
Higher/(Lower) | |
Income statement | | | | | | | | | |
Revenues | | | | | | | | | |
Special facility fees | | $ | - | | | $ | 31,131 | | | $ | (31,131 | ) |
Water tap fees | | | 49,948 | | | | 60,669 | | | | (10,721 | ) |
Net income | | $ | 58,153 | | | $ | 100,004 | | | $ | (41,852 | ) |
As of May 31, 2018 | |
| | As Reported | | | Amounts that would have been reported under ASC 605 (1) | | | Effect of Change
Higher/(Lower) | |
Balance Sheet | | | | | | | | | |
Liabilities | | | | | | | | | |
Deferred revenues, current | | $ | - | | | $ | 55,800 | | | $ | (55,800 | ) |
Deferred revenues, less current portion | | | - | | | | 957,836 | | | | (957,836 | ) |
Deferred oil and gas lease payment, current (1) | | | 55,733 | | | | 55,733 | | | | - | |
Deferred oil and gas lease payment, less current portion | | | 74,311 | | | | 74,311 | | | | - | |
| | | | | | | | | | | | |
Equity | | | | | | | | | | | | |
Accumulated deficit | | $ | (102,880,698 | ) | | $ | (103,893,896 | ) | | $ | 1,013,198 | |
| (1) | Inclusive of the Bison Lease deferred oil and gas lease payment and water tap and construction fee deferred revenues as described in the 2017 Annual Report. |
Revenue recognition related to the Company’s water and wastewater usage, consulting revenues and oil and gas revenues will remain substantially unchanged as a result of the adoption of ASU 2014-09. The most significant impact of the standard relates to the Company’s accounting for water and wastewater tap fees and special facility/construction fees, which revenues will be recognized in earlier periods when performance obligations are complete under the new revenue standard.
NOTE 2 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine where within the fair value.value hierarchy the measurement falls.
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had none of these instrumentsno Level 1 assets or liabilities as of May 31, 20172018 or August 31, 2016.2017.
Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had 5116 and 3656 Level 2 assets as of May 31, 20172018 and August 31, 2016,2017, respectively, which consistedconsist of certificates of deposit, U.S. Treasury bills and U.S. treasuryTreasury notes.
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had one Level 3 liability, the contingent portion of the CAA, as of May 31, 20172018 and August 31, 2016, which the2017. The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 4)4 – Long-Term Obligations and Operating Lease).
The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
Level 2 AssetsAsset – Available for Sale Securities. The Company’s available for sale securities are the Company’s only financial asset withmeasured at fair value measured on a recurring basis. At May 31, 2017, these The fair value of the available for sale securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit and U.S. treasuryTreasury bills and notes.
The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems, land held for sale, and other long-lived assets. See Note 3 – Water and Land Assets below.
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of May 31, 2017:2018:
| | | Fair Value Measurement Using: | |
| | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Accumulated Unrealized Gains and |
| | | | | | |
Certificates of deposit | $11,432,214 | $11,443,068 | $- | $11,432,214 | $- | $(10,854) |
U.S. Treasuries | 8,800,721 | 8,814,820 | - | 8,800,721 | - | (14,099) |
Subtotal | $20,232,935 | $20,257,888 | $- | $20,232,935 | $- | $(24,953) |
Long-term investments | 1,430,177 | 1,431,712 | - | 1,430,177 | | (1,535) |
Total | $21,663,112 | $21,689,600 | $- | $21,663,112 | $- | $(26,488) |
| | | | | | | | Fair Value Measurement Using: | | | | |
| | Fair Value | | | Cost / Other Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Accumulated Unrealized Gains and (Losses) | |
Certificates of deposit | | $ | 1,248,781 | | | $ | 1,250,000 | | | $ | - | | | $ | 1,248,781 | | | $ | - | | | $ | (1,219 | ) |
U.S. treasuries | | | 15,757,133 | | | | 15,695,690 | | | | - | | | | 15,757,133 | | | | - | | | | 61,443 | |
Total | | $ | 17,005,914 | | | $ | 16,945,690 | | | $ | - | | | $ | 17,005,914 | | | $ | - | | | $ | 60,224 | |
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2017:
| | | | | | | | Fair Value Measurement Using: | | | | |
| | Fair Value | | | Cost / Other Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Accumulated Unrealized Gains and (Losses) | |
Certificates of deposit | | $ | 12,673,700 | | | $ | 12,694,500 | | | $ | - | | | $ | 12,673,700 | | | $ | - | | | $ | (20,800 | ) |
U.S. treasuries | | | 7,381,700 | | | | 7,372,000 | | | | - | | | | 7,381,700 | | | | - | | | | 9,700 | |
Total | | $ | 20,055,400 | | | $ | 20,066,500 | | | $ | - | | | $ | 20,055,400 | | | $ | - | | | $ | (11,100 | ) |
The Company also holds a certificate of deposit that is not carried at fair value on the consolidated balance sheets and is classified as a held-to-maturity security. As of May 31, 2018, the carrying amount of held-to-maturity securities was $189,800. As of August 31, 2017, the carrying amount of held-to-maturity securities was $188,000.
NOTE 3 – WATER AND LAND ASSETS
Wild Pointe
On December 15, 2016, Rangeview, acting byThe Company’s water rights and through its current water and wastewater service agreements are more fully described in Note 4 – Water Activity Enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivisionLand Assets in Part II, Item 8 of the State of Colorado, acting by and through its Water Enterprise (the “EH86 District”), entered into a Water Service Agreement (the “Wild Pointe Service Agreement”). Subject2017 Annual Report. There have been no significant changes to the conditions set forth inCompany’s water rights or water and wastewater service agreements during the Wild Pointe Service Agreement and the terms of the Company’s engagement by Rangeview as Rangeview’s exclusive service provider, the Company acquired, among other things, the exclusive right to provide water services to residential and commercial customers in Wild Pointe Ranch, located in unincorporated Elbert County, Colorado, in exchange for $1,600,000 in cash. Pursuant to the terms of the Wild Pointe Service Agreement, the Company, in its capacity as Rangeview’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the EH86 District and for operating and maintaining the EH86 District’s water system. In exchange, the Company receives all rates, fees and charges remitted to Rangeview by the EH86 District pursuant to the Wild Pointe Service Agreement, including system development (or tap) fees from new customers and monthly water service revenues. The EH86 District’s water system currently provides water service to approximately 120 existing SFE water connections in Wild Pointe.
nine months ended May 31, 2018.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
Investment in Water and Water Systems
The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at May 31, 20172018 and August 31, 2016:2017:
| | |
| | Accumulated Depreciation and Depletion | | Accumulated Depreciation and Depletion |
Rangeview water supply | $14,495,400 | $(10,000) | $14,444,600 | $(9,400) |
Sky Ranch water rights and other costs | 6,723,000 | (411,348) | 6,607,400 | (334,500) |
Fairgrounds water and water system | 2,899,800 | (952,800) | 2,899,900 | (886,800) |
Rangeview water system | 1,639,000 | (193,300) | 1,624,800 | (152,800) |
Water supply – other | 3,886,000 | (375,500) | 3,703,000 | (297,800) |
Wild Pointe service rights | 1,661,000 | (53,152) | - | - |
Construction in progress | 5,035,400 | - | 723,500 | - |
Totals | 36,339,600 | (1,996,100) | 30,003,200 | (1,681,300) |
Net investments in water and water systems | $34,343,500 | $- | $28,321,900 | $- |
Construction in progress relates to the Sky Ranch project and includes engineering and other initial costs (approximately $764,000) and water line installation (approximately $4.3 million). The Company has incurred an additional approximately $210,000 related to the water line installation, which was subsequently paid in June 2017.
14
| | May 31, 2018 | | | August 31, 2017 | |
| | Costs | | | Accumulated Depreciation and Depletion | | | Costs | | | Accumulated Depreciation and Depletion | |
Rangeview water supply | | $ | 14,805,500 | | | $ | (12,100 | ) | | $ | 14,529,600 | | | $ | (10,600 | ) |
Sky Ranch water rights and other costs | | | 7,342,400 | | | | (523,100 | ) | | | 6,725,000 | | | | (436,300 | ) |
Fairgrounds water and water system | | | 2,899,900 | | | | (1,040,900 | ) | | | 2,899,900 | | | | (974,800 | ) |
Rangeview water system | | | 1,652,400 | | | | (247,700 | ) | | | 1,639,000 | | | | (207,000 | ) |
WISE partnership | | | 3,114,100 | | | | - | | | | 3,114,100 | | | | - | |
Water supply – other | | | 1,177,700 | | | | (486,700 | ) | | | 944,800 | | | | (401,300 | ) |
Wild Pointe service rights | | | 1,631,800 | | | | (251,400 | ) | | | 1,631,700 | | | | (213,000 | ) |
Sky Ranch pipeline | | | 4,697,800 | | | | (156,600 | ) | | | 4,700,000 | | | | (39,200 | ) |
Construction in progress | | | 1,006,400 | | | | - | | | | 673,800 | | | | - | |
Totals | | | 38,328,000 | | | | (2,718,500 | ) | | | 36,857,900 | | | | (2,282,200 | ) |
Net investments in water and water systems | | $ | 35,609,500 | | | | | | | $ | 34,575,700 | | | | | |
Capitalized terms in this section not defined herein are defined in Note 4 – Water and Land Assets toin Part II, Item 8 of the 20162017 Annual Report.
Depletion and Depreciation.Depreciation
The Company recorded depletion charges of $4,300 and $100 during each of the three months ended May 31, 2018 and 2017, and 2016.respectively. The Company recorded depletion charges of $600$5,300 and $200$600 during the nine months ended May 31, 20172018 and 2016,2017, respectively. During the three and nine months ended May 31, 2017, this2018, the depletion was related entirely to the Rangeview“Lowry Water Supply.” The Lowry Water Supply is defined as the “Rangeview Water Supply” and described in detail in Note 4 – Water and Land Assets in Part II, Item 8 of the Sky Ranch water assets.2017 Annual Report.
The Company recorded $148,400$211,000 and $108,700$148,400 of depreciation expense during the three months ended May 31, 20172018 and 2016,2017, respectively. The Company recorded $406,000$554,700 and $307,600$406,000 of depreciation expense during the nine months ended May 31, 2018 and 2017, and 2016, respectively. These figures include depreciation for other equipment not included in the table above.
NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE
The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular format, but is described below.
Participating Interests in Export Water Supply
The Company acquired its RangeviewLowry Water Supply through various amended agreements entered into beginning in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assetstoin Part II, Item 8 of the 20162017 Annual Report). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, ifIf the Company does not sell the Export Water, the holders of the Series B Preferred Stockpreferred stock of the Company are also not entitled to payment of any dividend and have no contractual recourse against the Company.
As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supplyliability account), with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS15
MAY 31, 2017
From time to time, the Company reacquired various portions of the CAA obligations, which retained their original priority, including the Land Board’s CAA interest which was assigned and relinquished to the Company in 2014. The Company did not make any CAA acquisitions during the ninethree months ended May 31, 2017 or 2016.2018 and 2017.
As a result of CAAthe acquisitions, the Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. The acquisitions and thecumulative sales of Export Water asare detailed in the table below, thebelow. The remaining potential third-party obligation at May 31, 2017,2018, is approximately $1 million, and the Company has the right to approximately $29.7 million in Export Water proceeds:million.
| | Export Water Proceeds Received | | | Initial Export Water Proceeds to Pure Cycle | | | Total Potential Third-Party Obligation | | | Paticipating Interests Liability | | | Contingency | |
Original balances | | $ | – | | | $ | 218,500 | | | $ | 31,807,700 | | | $ | 11,090,600 | | | $ | 20,717,100 | |
Activity from inception until August 31, 2017: | | | | | | | | | | | | | | | | | |
Acquisitions | | | – | | | | 28,042,500 | | | | (28,042,500 | ) | | | (9,790,000 | ) | | | (18,252,500 | ) |
Relinquishment | | | – | | | | 2,386,400 | | | | (2,386,400 | ) | | | (832,100 | ) | | | (1,554,300 | ) |
Option payments - Sky Ranch | | | 110,400 | | | | (42,300 | ) | | | (68,100 | ) | | | (23,800 | ) | | | (44,300 | ) |
and The Hills at Sky Ranch | | | | | | | | | | | | | | | | | | | | |
Arapahoe County tap fees (1) | | | 533,000 | | | | (373,100 | ) | | | (159,900 | ) | | | (55,800 | ) | | | (104,100 | ) |
Export Water sale payments | | | 676,500 | | | | (540,300 | ) | | | (136,200 | ) | | | (47,300 | ) | | | (88,900 | ) |
Balance at August 31, 2017 | | | 1,319,900 | | | | 29,691,700 | | | | 1,014,600 | | | | 341,600 | | | | 673,000 | |
Fiscal 2018 activity: | | | | | | | | | | | | | | | | | | | | |
Export Water sale payments | | | 51,900 | | | | (45,700 | ) | | | (6,200 | ) | | | (2,200 | ) | | | (4,000 | ) |
Balance at May 31, 2018 | | $ | 1,371,800 | | | $ | 29,646,000 | | | $ | 1,008,400 | | | $ | 339,400 | | | $ | 669,000 | |
| Export Water Proceeds Received | Initial Export Water Proceeds to Pure Cycle | Total Potential Third-Party Obligation | Paticipating Interests Liability | |
Original balances | $– | $218,500 | $31,807,700 | $11,090,600 | $20,717,100 |
Activity from inception until August 31, 2015: | | | | | |
Acquisitions | – | 28,042,500 | (28,042,500) | (9,790,000) | (18,252,500) |
Relinquishment | – | 2,386,400 | (2,386,400) | (832,100) | (1,554,300) |
Option payments - Sky Ranch | | | | | |
and The Hills at Sky Ranch | 110,400 | (42,300) | (68,100) | (23,800) | (44,300) |
Arapahoe County tap fees * | 533,000 | (373,100) | (159,900) | (55,800) | (104,100) |
Export Water sale payments | 618,400 | (489,100) | (129,300) | (44,900) | (84,400) |
Balance at August 31, 2016 | 1,261,800 | 29,742,900 | 1,021,500 | 344,000 | 677,500 |
Fiscal 2017 activity: | | | | | |
Export Water sale payments | 50,700 | (44,700) | (6,000) | (2,100) | (3,900) |
Balance at May 31, 2017 | $1,312,500 | $29,698,200 | $1,015,500 | $341,900 | $673,600 |
(1) | The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board. |
* The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board.
The CAA includes contractually established priorities thatwhich call for payments to CAA holders in order of their priority. This means that the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. TheOf the next approximately $6.6 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.9$5.8 million of revenue. Thereafter, the first priority payout (the remaining entire first priority payout totalsCompany will be entitled to all but approximately $6.7 million as$220,000 of May 31, 2017).the proceeds from the sale of Export Water after deduction of the Land Board royalty.
WISE Partnership
During December 2014, the Company, through Rangeview, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”), and the South Metro WISE Authority (“SMWA”). The SMWA was formed by Rangeview and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement. The SM IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed, and other infrastructure will be constructed over the next several years.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing Agreement (the “WISE Financing Agreement”) between the Company and Rangeview, the Company has an agreement to fund Rangeview’s participation in WISE effective as of December 22, 2014. The Company’s cost of funding Rangeview’s purchase of its share of existing infrastructure and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $5.5$5.2 million over the next five years. See further discussion in Note 6 –Related Party Transactions.
Operating Lease
Effective as of January 2017,February 2018, the Company entered into an operating lease for approximately 2,50011,393 square feet of office and warehouse space. The lease has a two-yearthree-year term with payments of $3,000$6,600 per month.month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary base payments. The change in the lease costs is not material to the Company’s operations.
NOTE 5 – SHAREHOLDERS’ EQUITY
The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. The Company began awarding options under the 2014 Equity Plan during January 2015. Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.
The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the nine months ended May 31, 2017:
| | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Approximate Aggregate Instrinsic Value |
Oustanding at August 31, 2016 | 338,000 | $4.83 | | |
Granted | 142,500 | 5.47 | | |
Exercised | - | - | | |
Forfeited or expired | (10,000) | 8.02 | | |
Outstanding at May 31, 2017 | 470,500 | $4.91 | 6.48 | $1,354,390 |
| | | | |
Options exercisable at May 31, 2017 | 323,000 | $4.68 | 5.16 | $1,003,990 |
2018:
| | Number of Options | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term | | | Approximate Aggregate Instrinsic Value | |
Oustanding at August 31, 2017 | | | 465,500 | | | $ | 4.88 | | | | 6.30 | | | $ | 1,007,740 | |
Granted (1) | | | 82,500 | | | | 8.05 | | | | | | | | | |
Exercised | | | (10,000 | ) | | | 7.50 | | | | | | | | | |
Forfeited or expired | | | (2,500 | ) | | | 7.50 | | | | | | | | | |
Outstanding at May 31, 2018 | | | 535,500 | | | $ | 5.31 | | | | 6.29 | | | $ | 2,163,540 | |
| | | | | | | | | | | | | | | | |
Options exercisable at May 31, 2018 | | | 379,668 | | | $ | 4.66 | | | | 5.21 | | | $ | 1,780,275 | |
PURE CYCLE CORPORATION | (1) | Includes 50,000 shares granted to Mr. Harding on September 27, 2017 and 32,500 total shares granted to the board of directors on January 17, 2018. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the nine months ended May 31, 2017:2018:
| | Number of Options | | | Weighted- Average Grant Date Fair Value | |
Non-vested options oustanding at August 31, 2017 | | | 147,500 | | | $ | 3.64 | |
Granted | | | 82,500 | | | | 4.41 | |
Vested | | | (74,168 | ) | | | 2.84 | |
Forfeited | | | - | | | | - | |
Non-vested options outstanding at February 28, 2018 | | | 155,832 | | | $ | 3.76 | |
| | Weighted-Average Grant Date Fair Value |
Non-vested options oustanding at August 31, 2016 | 36,000 | $4.59 |
Granted | 142,500 | 3.67 |
Vested | (31,000) | 2.95 |
Forfeited | - | - |
Non-vested options outstanding at May 31, 2017 | 147,500 | $3.52 |
All non-vested options are expected to vest.
Stock-based compensation expense was $63,500$83,600 and $58,200$63,500 for the three months ended May 31, 20172018 and 2016,2017, respectively. Stock-based compensation expense was $168,000$241,200 and $167,100$168,000 for the nine months ended May 31, 20172018 and 2016,2017, respectively.
At May 31, 2017,2018, the Company had unrecognized expenses totaling $392,500$378,400 relating to non-vested options that are expected to vest. The weighted-average period over which these options are expected to vest which options have a weighted average life of less than threeis approximately two years. The Company has not recorded any excess tax benefits to additional paid-in capital.
NOTE 6 – RELATED PARTY TRANSACTIONS
The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of Rangeview.the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of Rangeview.the Rangeview District. Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (the “Sky Ranch Districts”) and the CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of each of the Rangeview includeDistrict, the Sky Ranch Districts and the CAB consist of three employees of the Company and two independent board members.
On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”). The Company provides funding pursuant to the Participation Agreement annually with $22,200 and $198,200 being provided during fiscal years 2018 and 2017, respectively.
Through the WISE Financing Agreement, the Company agreed to fund the Rangeview District’s cost of participating in the regional water supply project known as the WISE partnership. The Company anticipates spending approximately $5.2 million over the next five fiscal years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE. To date, the Company has capitalized the funding provided pursuant to the WISE Financing Agreement because the funding has been provided to purchase capacity in the WISE infrastructure. Total investment in the WISE assets as of May 31, 2018 is approximately $3.1 million.
In 1995, the Company extended a loan to the Rangeview a related party.District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (6.00%(6.75% at May 31, 2017), and the2018). The maturity date of the loan is December 31, 2022. Beginning in2020. In January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement remains in effect. The $694,200$862,800 balance of the notenotes receivable at May 31, 2017,2018, includes borrowings of $319,900$470,300 and accrued interest of $374,300.$392,500.
On December 16, 2009, theThe Company entered into a Participation Agreement with Rangeview, whereby the Company agreed to providehas been providing funding to Rangeview in connection with Rangeview joining the South Metro Water Supply Authority (“SMWSA”). On November 10, 2014, the Company and Rangeview entered into the WISE Financing Agreement, which became effective on December 23, 2014, whereby the Company agreed to fund Rangeview’s cost of participating in a regional water supply project known as the WISE partnership. The Company anticipates spending approximately $5.5 million over the next five fiscal years to fund Rangeview’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE.
EachSky Ranch Districts. In each year, beginning insince 2012, the Company has entered into an Operation Funding Agreement with one of the Sky Ranch Metropolitan District No. 5Districts, obligating the Company to advance funding to the districtSky Ranch District for the district’s operations and maintenance expenses for the then-current calendar year. The district is expected to repay the amounts advanced pursuant to the funding agreements from future revenues from property tax assessments. All payments are subject to annual appropriations by the districtSky Ranch District in its absolute discretion. The advances by the Company accrue interest at a rate of 8% per annum from the date of the advance.
In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with a Sky Ranch Metropolitan District No. 5 obligating the Company to either finance district improvements or to construct improvements on behalf of the districtSky Ranch District subject to reimbursement. Improvements subject to this agreement are determined pursuant to a mutually agreed upon budget. Each year in September, the parties are to mutually determine the improvements required for the following year and finalize a budget by the end of October. Each advance or reimbursable expense accrues interest at a rate of 6% per annum. No payments are required by the district unless and until the district issues bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
The $211,300 balance of the receivable due pursuant to the Operation Funding Agreements and the Facilities Funding and Acquisition Agreement at May 31, 2017, includes advances of $180,200 and accrued interest of $31,100. Upon the district’sSky Ranch District’s ratification of the advances and related expenditures, the amount wasis reclassified to long-term and is recorded as part of Notes receivable – related parties.parties.
During the nine months ended May 31, 2018, the Sky Ranch Districts repaid all advances plus accrued interest totaling $215,504, and as of the period then ended, there was no outstanding balance on the receivable.
Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No. 1 and Sky Ranch Metropolitan District No. 5 formed the CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement with the CAB for the Sky Ranch property. Improvements subject to the Project Funding and Reimbursement Agreement are determined pursuant to a mutually agreed upon budget. Each advance or reimbursable expense accrues interest at a rate of 6% per annum. Upon the CAB’s ratification of the advances and related expenditures, the amount is recorded as part of Notes receivable – related parties and reclassified from a short-term to a long-term asset.
In February 2018, the Audit CommitteeCompany advanced the CAB $1,490,000 to begin construction of improvements on the Sky Ranch property. The $1,512,500 balance of the Company’s boardnotes receivable at May 31, 2018, includes borrowings of directors approved accepting a bid submitted by Nelson Pipeline Constructors LLC to construct a pipeline connecting its Sky Ranch water system to Rangeview’s water system for approximately $4.2 million (the “Nelson Bid”). Nelson Pipeline Constructors LLC is a wholly owned subsidiary$1,490,000 and accrued interest of Nelson Infrastructure Services LLC, a company in which Patrick J. Beirne owns a 50% interest. In addition, Mr. Beirne, a director of Pure Cycle, is Chairman and Chief Executive Officer of each of Nelson Pipeline Constructors LLC and Nelson Infrastructure Services LLC. Since Mr. Nelson is the 50% owner of the parent company of Nelson Pipeline Constructors LLC, Mr. Nelson’s interest in the transaction is approximately $2.1 million without taking into account any profit or loss from the Nelson Bid. Pursuant to the Company’s policies for review and approval of related party transactions, the Nelson Bid was reviewed and approved by the Audit Committee and by the board of directors, with Mr. Beirne abstaining.$22,500.
NOTE 7 – SIGNIFICANT CUSTOMERS
The Company sells wholesale water and wastewater services to Rangeview pursuantPursuant to the Rangeview Water Agreements (defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 20162017 Annual Report). and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and wastewater services on the Rangeview District’s behalf to the Rangeview District’s customers. Sales to the Rangeview District accounted for 75%9% and 78%75% of the Company’s total water and wastewater revenues for the three months ended May 31, 20172018 and 2016,2017, respectively. Sales to the Rangeview District accounted for 33%5% and 77%33% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2018 and 2017, and 2016, respectively. The Rangeview District has one significant customer. Pursuant tocustomer, the Rangeview Water Agreements, the Company is providing water and wastewater services to this customer on behalf of Rangeview.Ridgeview Youth Services Center. Rangeview’s significant customer accounted for 59%4% and 63%59% of the Company’s total water and wastewater revenues for the three months ended May 31, 20172018 and 2016,2017, respectively. Rangeview’s significant customer accounted for 26%4% and 66%26% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2018 and 2017, respectively.
Revenues related to the provision of water for the oil and 2016, respectively.
gas industry to one customer accounted for 87% of the Company’s water and wastewater revenues for the three months ended May 31, 2018. Revenues related to the provision of water for the oil and gas industry to three customers accounted for 91% of the Company’s water and wastewater revenues for the nine months ended May 31, 2018. Revenues related to the provision of water for the oil and gas industry to one customer accounted for 0% and 55% of the Company’s water and wastewater revenues for the three and nine months ended May 31, 2017, respectively. The Company had no revenues related to the provision of water for the oil and gas industry for the three or nine months ended May 31, 2016.
The Company had accounts receivable from the Rangeview District which accounted for 64%26% and 74%50% of the Company’s wholesale water and wastewater trade receivables balances at May 31, 20172018 and August 31, 2016,2017, respectively. Accounts receivable from Rangeview’sthe Rangeview District’s largest customer accounted for 57%15% and 63%19% of the Company’s water and wastewater trade receivables as of May 31, 20172018 and August 31, 2016,2017, respectively. As of May 31, 2018 and August 31, 2017 one significant customer accounted for 55% and 46% of the Company’s trade receivables balances, respectively.
NOTE 8 – ACCRUED LIABILITIES
At May 31, 2018, the Company had accrued liabilities of $379,300, of which $4,900 was for estimated property taxes, $68,000 was for professional fees, and $306,400 was for operating payables.
At August 31, 2017, the Company had accrued liabilities of $70,800,$380,900, of which $4,000$265,000 was for accrued compensation, $5,000 was for estimated property taxes, $39,500 was for professional fees, and $27,300 was for operating payables.
At August 31, 2016, the Company had accrued liabilities of $242,600, of which $160,000 was for accrued compensation, $5,700 was for estimated property taxes, $48,000$48,500 was for professional fees, and the remaining $28,900$62,400 was related to operating payables.
NOTE 9 – LITIGATION LOSS CONTINGENCIES
The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows.
The Company is currently not aware of any probable or reasonably possible claims requiring disclosure or an accrual.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
NOTE 10 – SEGMENT INFORMATION
Prior to the sale of the Company’s agricultural assets and the residual operations through December 31, 2015, the Company operated primarily in two lines of business: (i) the wholesale water and wastewater business;business and (ii) the agricultural farming business. The Company has discontinued its agricultural farming operations. TheCurrently, the Company will continue to operateoperates its wholesale water and wastewater services segment as its only line of business.business but anticipates it will report its land development activities at Sky Ranch as a separate segment in future filings. The wholesale water and wastewater services business includes selling water service to customers, which is then provided by the Company using water rights owned or controlled by the Company and developing infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater.
NOTE 11 – SUBSEQUENT EVENTS
In June 2017,As part of the Company’s Sky Ranch development, the Company entered into agreements with three national home builders, Richmond American Homes, KB Home and Taylor Morrison,contracts for the sale of 506 single family lots in its first phase(see Note 1 – Presentation of Sky Ranch. The agreements provide for earnest money deposits and a 60-day due diligence investigationInterim Information). The lot prices range from $67,500 to $75,000 depending onCompany anticipates that the lot size and specific terms and conditions of the agreement with each builder. The Companyreal estate sales will be responsible for developing finished lots and believes it has adequate liquidity to fund the improvements needed to deliver finished lots to each builder. The Company considers lot sales to be a separate linesegment in fiscal 2018. As of May 31, 2018, there were no real estate revenues or profits, and the carrying cost of the real estate is primarily inventory and reimbursable costs which were approximately $3.7 million and are less than 10% of the Company’s total assets. Oil and gas royalties and licenses are a passive activity and not an operating business activity, and will disclose the salestherefore, are not classified as a separate segment from the wholesale water and wastewater business. This segment will include certain Sky Ranch Land assets totaling approximately $4.2 million, which are recorded on the balance sheet at May 31, 2017.segment.
Item 2.19Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
OVERVIEW
The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20162017 (the “2016“2017 Annual Report”). This section focuses on the key indicators reviewed by management in evaluating our financial condition and operating performance, including the following:
● | · | Revenue generated from providing water and wastewater services; |
Revenue generated from providing water and wastewater services;
| · | Expenses associated with developing our water and land assets; and |
●
Expenses associated with developing our water and land assets; and
●
Cash available to continue development of our water rights, land assets and service agreements.
| · | Cash available to continue development of our land, water rights and service agreements. |
Our MD&A section includes the following items:
Our Business –a general description of our business, our services and our business strategy.
Results of Operations – ananalysis of our results of operations for the periods presented in our consolidated financial statements. We present our discussion in the MD&A in conjunction with the accompanying financial statements.
Liquidity, Capital Resources and Financial Position –an analysis of our cash position and cash flows, as well as a discussion of our financial obligations.
Critical Accounting Policies and Use of Estimates –a discussion of our critical accounting policies that require critical judgments, assumptions and estimates.
Our Business
Pure Cycle Corporation (“we,” “us,” or “our”) is a Colorado corporation that (i) provides wholesale water and wastewater services to end-use customers of governmental entities and to commercial and industrial customers and (ii) untilis developing 931 acres of land zoned as a Master Planned Community along the end of calendar 2016, managed land and water assets for farming.I-70 corridor known as Sky Ranch.
Wholesale Water and Wastewater
TheseOur utility services include water production, storage, treatment, bulk transmission to retail distribution systems, wastewater collection and treatment, irrigation water treatment and transmission, industrial water sales, construction management, billing and collection and emergency response.
We are a vertically integrated wholesale water and wastewater provider, which means we own or control substantially all assets necessary to provide wholesale water and wastewater services to our customers. This includes owning (i) water rights which we use to provide domestic, irrigation, and industrial water to our wholesale customers (we own surface water, groundwater, reclaimed water rights and storage rights); (ii) infrastructure (such as wells, diversion structures, pipelines, reservoirs and treatment facilities) required to withdraw, treat, store and deliver water; (iii) infrastructure required to collect, treat, store and reuse wastewater; and (iv) infrastructure required to treat and deliver reclaimed water for irrigation and industrial use.
We own or control directly or through our participation in regional water partnerships approximately 26,98528,634 acre feet of surface water,tributary, non-tributary and not non-tributary groundwater rights and approximately 26,000 acre feet of adjudicated reservoir sites that we refer to as our “Rangeview Water Supply.”sites. This water is located in the southeast Denver metropolitan area onarea. Most of our water is located at the Lowry Range, a 27,000 acre27,000-acre parcel of land which is owned by the State of Colorado Board of Land Commissioners (the “Land Board”) known as the. Our “Lowry Range.” Of theWater Supply” consists of approximately 26,985 acre feet of water, comprising our Rangeview Water Supply, we own 11,650 acre feet of water which we own and can export from the Lowry Range (“Export Water”), which. Our Export Water consists of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water, pending completion by the Land Board of documentation related to the exercise of our right to substitute 1,650 acre feet of our groundwater for a comparable amount of surface water. Additionally, assuming the completion of the substitution of groundwater for surface water, we hold the exclusive right to develop and deliver through the year 2081 the remaining 12,035 acre feet of groundwater and approximately 1,650 acre feet of average yield surface water to customers either on or off of the Lowry Range.
20
We currently provide wholesale water and wastewater service predominantly to two local governmental entity customers. Our largest wholesale domestic customer is the Rangeview Metropolitan District (“Rangeview”(the “Rangeview District”). We provide service to the Rangeview District and its end-use customers pursuant to the Rangeview Water Agreements (defined in Part I, Item 1 – Business – Our Water and Land Assets in the 20162017 Annual Report). Through the Rangeview including through our recently acquired Wild Pointe Service Agreement,District, we serve 378391 Single Family Equivalent (“SFE”) water connections and 157 SFE wastewater connections located in southeastern metropolitan Denver. In the past three years, we have been providing
We also provide untreated water to industrial customers in the oil and gas industry located in our service areas and adjacent to our service areas for the purpose of hydraulic fracturing. Oil and gas operators have leased more than 135,000 acres within and adjacent to our service areas for the purpose of exploring oil and gas interests in the Niobrara and other formations, and this activity hadhas led to increasedvarying water demands.
We plan to utilize our significant water assets along with our adjudicated reservoir sites to provide wholesale water and wastewater services to local governmental entities, which in turn will provide residential/commercial water and wastewater services to communities along the eastern slope of Colorado in the area generally referred to as the Front Range. Principally, we target the I-70 corridor, which is located east of downtown Denver and south of Denver International Airport. This area is predominantly undeveloped and is expected to experience substantial growth over the next 30 years. We also plan to continue to provide water service to commercial and industrial customers.
Sky Ranch
We also own 931 acres of land, zoned as a Master Planned Community along the I-70 corridor east of Denver, Colorado. In anticipation of developing this land, we have installed approximately eightten miles of water transmission lines at a cost of $4.3 million to connect our Lowry Range water system to Sky Ranch. Construction was completed in May 2017Ranch and the water transmission line was placed intohave extended service in June 2017.lines to our initial phase of development at Sky Ranch.
Subsequent Event
Additionally, inIn June 2017, we entered into purchase and sale agreements (collectively, the “Purchase and Sale Contracts”) with three nationalseparate home builders Richmond American Homes, KB Homepursuant to which we agreed to sell, and Taylor Morrison,each builder agreed to purchase, a certain number (totaling 506) of single-family, detached residential lots at the Sky Ranch property. Each builder is also required to purchase from the Rangeview District water and sewer taps for the sale of 506 single family lots in the first phase of Sky Ranch. The agreements provide forlots. Each builder had a 60-day due diligence investigation, afterperiod which we will finalize designs forwas extended, during which it had the community includingright to terminate the final platted lots, roadways, open space, drainage,Purchase and Sale Contract and receive a full refund of its earnest money deposit. On November 10, 2017, each builder completed its due diligence period and agreed to continue with its respective Purchase and Sale Contract.
We are obligated, pursuant to the Purchase and Sale Contracts, or separate Lot Development Agreements (the “Lot Development Agreements” and, together with the Purchase and Sale Contracts, the “Builder Contracts”), to construct infrastructure and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and wastewater systems. Thesanitary sewer mains and stubs, storm water management facilities, and lot prices range from $67,500 to $75,000 depending on the lot size and specific terms and conditionsgrading improvements for delivery of the agreement with each builder. We will be responsible for developing finished lots and believe we have adequate liquidity to fund the improvements needed to deliver finished lots to each builder. Pursuant to the Builder Contracts, we must cause the Rangeview District to install and construct off-site infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property. In conjunction with approvals with Arapahoe County for the Sky Ranch project, we and/or the Rangeview District and the Sky Ranch Metropolitan Districts, quasi-municipal corporations and political subdivisions of Colorado formed to provide service to the Sky Ranch property (the “Sky Ranch Districts”), are obligated to deposit into an account the anticipated costs to install and construct substantially all the off-site infrastructure improvements (which include drainage and storm water retention ponds and an entry roadway). The Rangeview and Sky Ranch off-site infrastructure improvements are estimated to cost approximately $10.2 million. We considerfinance the obligations of the Rangeview District and the Sky Ranch Districts as described in Note 6 – Related Party Transactions to the accompanying consolidated financial statements.
We estimate that the development of the finished lots for the first phase (506 lots) of Sky Ranch will require total capital of approximately $27.8 million and that lot sales to behome builders will generate gross proceeds of approximately $35 million, providing a separate lineprojected margin on lots of businessapproximately $7.2 million. The costs of developing lots and will discloserevenues from the sales as a separate segmentof finished lots are expected to be incurred over several quarters and the timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals, installation of improvements, and completion of lot deliveries. Utility revenues are derived from the wholesaletap fees (which vary depending on lot size, house size, and amount of irrigated turf) and usage fees (which are monthly water and wastewater business.fees).
In addition to the lot sales, we will collect water and wastewater tap fees for each lot which will be paid at the time builders obtain building permits. The water tap fees will vary depending on the projected water demand for each individual lot. The average single family equivalent using 0.4 acre of water per year would correspond to a tap fee of $26,650. Wastewater tap fees are projected to be $4,600 per lot.
Frack Water Sales
During the three months ending May 31 and thereafter, new oil and gas drilling activity has commenced in our target service area with one rig having started its 4th well in the area. The region has had an increase in oil and gas activity with several new operators obtaining leases in the field with the expectation of additional drilling rig(s) later this year and into 2018. We have delivered frack water to one of the new operators under a new well stimulation design that more than doubled the amount of water used from 10 million gallons to more than 20 million gallons, increasing the revenue potential from $100,000 per well to $200,000 under the new design. We have significantly increased our supply capacity with the addition of the WISE water supply as well as our delivery capacity with completion of our new eight-mile transmission line to Sky Ranch. We believe we are well positioned to meet the increased demands from multiple operators in the field as well as water demands for development at our Sky Ranch project.21
| Three Months Ended May 31, | |
| | | | |
Other income items: | | | | |
Oil and gas lease income, net | $6,000 | $31,900 | $(25,900) | -81% |
Oil and gas royalty income, net | $24,900 | $76,400 | $(51,500) | -67% |
Interest income | $59,600 | $66,300 | $(6,700) | -10% |
| Nine Months Ended May 31, | |
| | | | |
Other income items: | | | | |
Oil and gas lease income, net | $17,300 | $354,800 | $(337,500) | -95% |
Oil and gas royalty income, net | $164,300 | $271,000 | $(106,700) | -39% |
Interest income | $199,200 | $175,400 | $23,800 | 14% |
The oilOil and gas lease income amounts in 2016 primarily represent a portion of the up-front payments we received on March 10, 2011, upon the signing of a Paid-Up Oil and Gas Lease that was subsequently purchased by a wholly-owned subsidiary of ConocoPhillips Company (the "O&G Lease") and a Surface Use and Damage Agreement (the "Surface Use Agreement"). During fiscal year 2011, we received payments of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate we own at our Sky Ranch property. The income received was recognized in income ratably over the initial three-year term of the O&G Lease, which began on March 10, 2011. During February 2014, we received an additional payment of $1,243,400 to extend the initial term of the O&G Lease by an additional two years through February 2016. The income received for the extension was recognized in income over the two-year extension term of the O&G Lease.– The oil and gas lease income amounts in 2017 and a small portion of 2016 represent a portion of the up-front payment of $72,000 we received in fiscal 2014 for exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate we own adjacent to the Lowry Range (the "Rangeview Lease"“Rangeview Lease”). The income received for the Rangeview Lease is beingwas recognized ratably through June 2017.2017, and the Rangeview Lease has expired.
On October 5, 2017, we entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate we own adjacent to the Lowry Range (the “Bison Lease”). Pursuant to the Bison Lease, we received an up-front payment of $167,200, which will be recognized as income on a straight-line basis over three years (the term of the Bison Lease). We recognized lease income of $13,900 and $37,200 during the three and nine months ended May 31, 2018, respectively, related to the up-front payment received pursuant to the Bison Lease. As of May 31, 2018, we had deferred recognition of $130,000 of income related to the Bison Lease, which will be recognized into income ratably through September 2020.
Oil and gas royalty income – In 2011, we entered into a Paid-Up Oil and Gas Lease, which was subsequently purchased by a wholly-owned subsidiary of ConocoPhillips Company, for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate we own at our Sky Ranch property (the “Sky Ranch O&G Lease”). The Sky Ranch O&G Lease is held by production through two wells drilled in our mineral estate. The oil and gas royalty income represents amounts received pursuant to the Sky Ranch O&G Lease. The amount includesLease as royalties from oil and gas production from wells in our mineral estate at Sky Ranch. The royalties for the three months ended May 31, 20172018, were approximately $24,900,$61,100, as compared to $76,400$24,900 for the same period in 2016.2017. The royalties for the nine months ended May 31, 20172018 were approximately $164,300,$152,700, as compared to $271,000$164,300 for the same period in 2016.2017. The decrease in oil and gas royalties is primarily attributed to one well undergoing maintenance during the quarter. As parta result of the maintenance the well ceasedlower production for a substantial portion of the quarter ended May 31, 2017.oil and gas from wells in our mineral estate at Sky Ranch.
Interest Income – Interest income represents interest earned on the temporary investment of capital in cash and cash equivalents, available-for-sale securities, finance charges, and interest accrued on the notes receivable from the Rangeview District and the Sky Ranch Metropolitan District No. 5.Districts. The increasedecrease was primarily attributable to the investmentuse of cash received fromto invest in the saledevelopment of our farms in August 2015 in a money market fund at a bank, certificates of deposit, and investments in U.S. treasury securities.Sky Ranch.
Discontinued Operations
For additional information about our discontinued operations, see NotesNote 1 – Presentation of Interim Information to Consolidated Financial Statements.the accompanying consolidated financial statements.
The following table provides the components of discontinued operations:
Table 5 - Discontinued Operations Income Statement | |
| | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Farm revenues | | $ | 1,000 | | | $ | 600 | | | $ | 2,400 | | | $ | 6,300 | |
Farm expenses | | | - | | | | - | | | | - | | | | - | |
Gross profit | | | 1,000 | | | | 600 | | | | 2,400 | | | | 6,300 | |
| | | | | | | | | | | | | | | | |
General and administrative expenses | | | - | | | | 11,900 | | | | - | | | | 48,300 | |
Operating (loss) profit | | | 1,000 | | | | (11,300 | ) | | | 2,400 | | | | (42,000 | ) |
Finance charges | | | - | | | | - | | | | - | | | | 9,400 | |
| | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations | | $ | 1,000 | | | $ | (11,300 | ) | | $ | 2,400 | | | $ | (32,600 | ) |
| Three Months Ended May 31, | Nine Months Ended May 31, |
| | | | |
Farm revenues | $600 | $- | $6,300 | $276,000 |
Farm expenses | - | (22,700) | - | (56,000) |
Gross profits (loss)
| 600 | (22,700) | 6,300 | 220,000 |
| | | | |
General and administrative expenses | 11,900 | 48,400 | 48,300 | 287,800 |
Operating (loss) profit | (11,300) | (71,100) | (42,000) | (67,800) |
Gain of sale of farm assets | - | - | - | 4,300 |
Finance charges | - | 9,800 | 9,400 | 42,000 |
Income (loss) from discontinued operations | $(11,300) | $(61,300) | $(32,600) | $(21,500) |
We anticipate continued expenses through the end of calendar 2017fiscal 2018 related to the discontinued operation. We will incuroperations, including expenses related to the remaining agricultural land we continue to own and for the purpose of collecting outstanding receivables.
Liquidity, Capital Resources and Financial Position
At May 31, 2017,2018, our working capital, defined as current assets less current liabilities, was $26.7$24.1 million, which included $26.0$19.9 million in cash and cash equivalents and short-term investments, and we have an additional $1.4 million$190,000 held in long-term investments.
We believe that as of May 31, 20172018, and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months.
Sky Ranch SaleDevelopment – During fiscal year 2018, we began construction of Farm Assets –off-site improvements at Sky Ranch, including drainage improvements, access roads and other improvements which are estimated to cost approximately $10.2 million. As of May 31, 2018, Sky Ranch development costs of approximately $1.6 million have been incurred. We soldexpect to phase construction of lots to deliver approximately 250 initial lots to builders over the next 12-18 months, which have an estimated construction cost of approximately $8 million. Pursuant to our Arkansas River farm assetsBuilder Contracts, we will collect certain funds from two of the three builders as we reach specified infrastructure milestones. We estimate that the development of the finished lots for the first phase (506 lots) of Sky Ranch will require total capital of approximately $45.8$28 million and estimate lot sales to home builders will generate approximately $35 million, providing a projected margin on August 18, 2015.lots of approximately $7 million. We believe that our plan for phased construction and delivery of lots together with the progress payments from builders will enable us to have adequate cash to fund the development of lots.
System Expansion –During the nine months ended May 31, 2017, we spent approximately $4.3 million to install approximately eight miles of pipeline and other infrastructure at our Sky Ranch water system and infrastructure at Rangeview. The pipeline was completed and placed into service in June 2017.
ECCV Capacity Operating System – –Pursuant to a 1982 contractual right, Rangeview may purchase water produced from the East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board System (“ECCV”), whichsystem. ECCV’s Land Board system is comprised of eight wells and more than 10 miles of buried water pipeline located on the Lowry Range. In May 2012, in order to increase the delivery capacity and reliability of these wells, in our capacity as Rangeview’s service provider and the Export Water Contractor (as defined in the 2014 Amended and Restated Lease Agreement among us, Rangeview and the Land Board), we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our costs associated with the use of the ECCV system are a flat fee of $8,000 per month from January 1, 2013 through December 31, 2020, and will decrease to $3,000 per month from January 1, 2021 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV’s system, which is included in the water usage fees charged to customers. In addition, in 2018 the ECCV system costshas cost us and is anticipated to continue to cost us approximately $1,900$8,200 per month to maintain.
South Metropolitan Water Supply Authority (“SMWSA”) and the Water Infrastructure Supply Efficiency Partnership (“WISE”) –SMWSA is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including Rangeview. Pursuant to the SMWSA Participation Agreement with Rangeview, we agreed to provide funding to Rangeview in connection with its membership in the SMWSA. In July 2013, Rangeview, together with nine other SMWSA members, formed an entity to enable its members to participle in a cooperative water project known as WISE and entered into an agreement that specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. On December 31, 2013, the South Metro WISE Authority (“SMWA”), the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”) and the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”) entered into the Amended and Restated WISE Partnership – Water Delivery Agreement (the “WISE Partnership Agreement”), which provides for the purchase of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. We have entered into the Rangeview/Pure Cycle WISE Project Financing Agreement (the “WISE Financing Agreement”), which obligates us to fund Rangeview’s cost of participating in WISE. We anticipate that we will be investing approximately $1.2$5.2 million per year for each ofin total over the next five fiscal years to fund Rangeview’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE. In exchange for funding Rangeview’s obligations in WISE, we will have the sole right to use and reuse Rangeview’s 7% share of the WISE water and infrastructure to provide water service to Rangeview’s customers and to receive the revenue from such service. Upon completion of the WISE infrastructure in 2017,At full capacity, we expect towill be entitled to approximately three million gallons per day of transmission pipeline capacity and 500 acre feet per year of water.
Summary Cash Flows Table
Table 6 - Summary Cash Flows Table | |
| | Nine Months Ended May 31, | | | | |
| | 2018 | | | 2017 | | | $ Change | | | % Change | |
Cash (used in) provided by: | | | | | | | | | | | | |
Operating activities | | $ | (1,356,300 | ) | | $ | (839,200 | ) | | $ | (517,100 | ) | | | (62 | %) |
Investing activities | | $ | (1,631,800 | ) | | $ | 1,891,600 | | | $ | (3,523,400 | ) | | | (186 | %) |
Financing activities | | $ | 288,400 | | | $ | (2,100 | ) | | $ | 290,500 | | | | 13833 | % |
Table 5 - Summary Cash Flows Table
| Nine Months Ended May 31, | |
| | | | |
Cash (used in) provided by: | | | | |
Operating acitivites | $(839,200) | $(215,000) | $(624,200) | 290% |
Investing activities | $1,891,600 | $(31,757,800) | $33,649,400 | -106% |
Financing activities | $(2,100) | $(1,600) | $(500) | 31% |
ChangesChanges in Operating Activities –Operating activities include revenues we receive from the sale of wholesale water and wastewater services and from leases on our farms, costs incurred in the delivery of those services, G&A expenses, and depletion/depreciation expenses.
Cash used in operations in the nine months ended May 31, 2017,2018, increased by $624,200approximately $517,100 compared to the nine months ended May 31, 2016,2017, which wasis primarily due mainly to the payment of approximately $1.1 million for a collateral deposit paid to the Southeast Metro Stormwater Authority in association of with the grading, erosion and sediment control permit application for Sky Ranch, anticipated to be refunded within twelve months, increased customer billings of approximately $674,000 due to increased fracking revenue, the capitalized costs to develop lots at Sky Ranch included in inventory of $382,600 and payments of approximately $138,600 of accounts payable, offset by an increase of net income of $1.3 million and taxesan increase in deferred oil and increased operating losses.gas lease payments of $148,000 for the nine months ended May 31, 2018.
Changes in Investing Activities–The use of cash in investing activities during the nine months ended May 31, 2018, consisted of the sale of available for sale securities Investingof $3.1 million, the investment in our water system of $3.4 million, funding payment of $1,490,000 for Sky Ranch Community Authority Board to begin construction on Sky Ranch and the purchase of equipment of $271,100. Cash provided by investing activities in the nine months ended May 31, 2017 consisted of the sale of available for sale securities for $8.4 million, the investment in our water systemssystem of $6.4 million, of which approximately $4.1 million (of the expectedtotal estimated $4.3 million)million cost) related to construction of the Sky Ranch pipeline, $1.6 million related to the Wild Pointe purchase and approximately $0.1 million related to the WISE infrastructure, and the purchase of equipment of $77,200. Investing
Changes in Financing Activities – Cash provided by financing activities induring the nine months ended May 31, 2016,2018, consisted of a receipt of a note receivable of $215,500 from a Sky Ranch District and proceeds from the purchaseexercise of $23.1 millionstock options of available for sale securities, the purchase$75,000, offset by a payment to contingent liability holders of $7.0 million of long term investments, the investment$2,200. Cash used in our water systems of $695,700 and the purchase of equipment of $411,800.
Changes in Financing Activities–Financingfinancing activities induring the nine months ended May 31, 2017 and 2016, consisted of paymentsa payment to contingent liability holders of $2,100 and $1,600, respectively$2,100.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply to the accompanying financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of “Export Water” (defined in Note 4 –Export Water, and Land Assetsin Part II, Item 8 of the 2016 Annual Report), the amounts and timing of which are not reasonably determinable.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment of water assets and other long-lived assets, fair value estimates and share-based compensation. Below is a summary of these critical accounting policies.
Revenue Recognition
Our revenues consist mainly of monthly service fees, tap fees, construction fees, and constructionconsulting fees. Additionally, we receive other income from oil and gas leases and related royalties on our properties. Monthly metered water usage fees, and monthly wastewater treatment fees, consulting fees and oil and gas royalties are recognized in income each month as earned.
AsUntil September 1, 2017, as further described in Note 12 –Summary of Significant Accounting Policies Presentationin Part II, Item 8 of Interim Informationto the accompanying financial statements, proceeds from2017 Annual Report, tap sales and construction fees are deferred upon receipt and recognized in income based on whether we own the facilities constructed with the proceeds. We recognize tap fees derived from agreements for which we constructconstructed infrastructure owned by others were deferred upon receipt and recognized as revenue along with the associated costs of construction, pursuant to the percentage-of-completion method. The percentage-of-completion method requires management to estimate the percent of work that is completed on a particular project, which could change materially during the construction period and result in significant fluctuations in revenue recognized during the reporting periods throughout the construction process. We did not recognize any revenues pursuant to the percentage-of-completion method during the three and nine months ended May 31, 2017 or May 31, 2016.
Tap and construction fees derived from agreements for which we ownowned the infrastructure arewere recognized as revenue ratably over the estimated service life (30 years or more) of the assets constructed with such fees. Although
In the cash will be received up-front and most construction will bethree-month period ended November 30, 2017, we completed within one year of receiptour review of the proceeds, revenue recognition may occur over 30 years or more. Management is required to estimateadoption of ASU 2014‑09 and the service life, and currently the service life is basedrelated impact on the estimated useful accounting life of the assets constructed with the tap fees. The useful accounting life of the asset is based on management’s estimation and may not have any correlation to the actual life of the asset or the actual service life of the tap. The accounting-based useful life is deemed a reasonable recognition life of the revenues because the depreciation of the assets constructed generating those revenues will therefore be matched with the revenues.
On March 10, 2011, we entered into the O&G Lease. Pursuant to the O&G Lease, during each of the fiscal years ended August 31, 2011our revenue streams (water and 2014, we received up-front payments of $1,243,400 for the purpose of exploring for, developing, producingwastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and marketing oil and gas revenues). Upon completion of our evaluation of the standard, we determined to early adopt the new revenue recognition standard beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. We concluded that the adoption did have a material impact on our financial statements.
We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit, which resulted in a reduction of our accumulated deficit of approximately 634 acres$1.1 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The most significant impact of mineral estatethe standard relates to our accounting for tap fees and special facility or construction fees, which revenues are expected to be recognized in earlier periods under the new revenue standard. Revenue recognition related to our water and wastewater usage fees and consulting fees will remain substantially unchanged as a result of the new revenue standard. Monthly wholesale water usage charges are assessed to our customers based on actual metered usage each month plus a base monthly service fee. We recognize wholesale water usage revenues upon delivering water to our customers or our governmental customer’s end-use customers, as applicable. We invoice sales of Export Water directly, and revenues we own at ourrecognize from such sales are shown gross of royalties to the Land Board. Sales of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to us by the Rangeview District. Water revenues from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.
We recognize wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District. Costs of delivering water and providing wastewater services to customers are recognized as incurred.
Revenues received pursuant to the Rangeview Lease, the Sky Ranch property. We recognized or are recognizingO&G Lease and the Bison Lease consisting of up-front payments from the O&G Leasewere recognized as other income on a straight-line basis over three years (thethe initial term or extension of term, as applicable, of the O&G Lease) and over two years (the extended term of the O&G Lease). Pursuant to the Rangeview Lease, during the fiscal year ended August 31, 2015, we received an up-front payment of $72,000 for the purpose of exploring for, developing, producing and marketing oil and gas on 40 acres of mineral estate we own adjacent to the Lowry Range. In connection with the up-front payments received pursuant to the O&G Lease and the Rangeview Lease, we recognized oil and gas lease income of (i) $6,000 and $31,900 during the three months ended May 31, 2017 and 2016, respectively, and (ii) $17,300 and $354,800 for the nine months ended May 31, 2017 and 2016, respectively.
During the three months ended February 28, 2015, two wells were drilled within our mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to us. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. We received royalties attributable to these wells of (i) $24,900 and $76,400 during the three months ended May 31, 2017 and, 2016, respectively, and (ii) $164,300 and $271,000 for the nine months ended May 31, 2017 and, 2016, respectively.
Prior to discontinuing our farm operations, we leased our farms to local area farmers on both a cash and crop share lease basis. Our cash lease farmers were charged a fixed fee, which was billed semi-annually in March and November. During the November billing cycle, our cash lease billings included either a discount or a premium adjustment based on actual water deliveries by the FLCC. Our crop share lease fees were based on actual crop yields and were received upon the sale of the crops. All fees were estimated and recognized ratably on a monthly basis. We sold our farms in August 2015; however, pursuant to the purchase and sale agreement, we continued to receive lease income through December 31, 2015.leases.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment whenever management believes events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated future undiscounted net cash flows we expect to be generated by the eventual use of the asset. If such assets are considered to be impaired and, therefore, the costs of the assets deemed to be unrecoverable, the impairment to be recognized would be the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Our water assets will be utilized in the provision of water services that inevitably will encompass many housing and economic cycles. Our service capacities are quantitatively estimated based on an average single family home utilizing .4 acre feet of water per year. Average water deliveries are approximately .4 acre feet; however, approximately 50% or .2 acre feet are returned and available for reuse. Our water supplies are legally decreed to us through the water court. The water court decree allocates a specific amount of water (subject to continued beneficial use), which historically has not changed. Thus, individual housing and economic cycles typically do not have an impact on the number of connections we can serve with our supplies or the amount of water legally decreed to us relating to these supplies.
We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. See further discussion regarding our land held for sale in Note 4 – Water and Land Assets to Part II, Item 8 of our 20152017 Annual Report.
Our Front Range Water Rights –We determine the undiscounted cash flows for our Denver-based assets by estimating tap sales to potential new developments in our service area and along the Front Range, using estimated future tap fees less estimated costs to provide water services, over an estimated development period. Actual new home development in our service area and the Front Range, actual future tap fees, and actual future operating costs inevitably will vary significantly from our estimates, which could have a material impact on our financial statements as well as our results of operations. We performed an impairment analysis as of August 31, 2016,2017, and determined that there were no material changes and that our Denver-based assets are not impaired and their costs are deemed recoverable. Our impairment analysis is based on development occurring within areas in which we have service agreements (e.g., Sky Ranch and the Lowry Range) as well as in surrounding areas, including the Front Range and the I-70 corridor. Our combined RangeviewLowry Water Supply and Sky Ranch water assets have a carrying value of $28.0$35.6 million as of May 31, 2017.2018. Based on the carrying value of our water rights, the long-term and uncertain nature of any development plans, current tap fees of $24,620$26,650 and estimated gross margins, we estimate that we would need to add 2,300 new water connections (requiring 3.5% of our portfolio) to generate net revenues sufficient to recover the costs of our RangeviewLowry Water Supply assets. If tap fees increase 5%, we would need to add 2,100 new water taps (requiring 3.4% of our portfolio) to recover the costs of our RangeviewLowry Water Supply assets. If tap fees decrease 5%, we would need to add 2,400 new water taps (requiring 3.7% of our portfolio) to recover the costs of our RangeviewLowry Water Supply assets.
Although changesChanges in the housing market throughout the Front Range have delayedcan vary from our estimated tap sale projections,projections; however, these changes do not alter our water ownership, our service obligations to existing properties or the number of SFEs we can service.
Share-Based Compensation
We estimate the fair value of share-based payment awards made to key employees and directors on the date of grant using the Black-Scholes option pricing model. We then expense the fair value over the vesting period of the grant using a straight-line expense model. The fair value of share-based payments requires management to estimate or calculate various inputs such as the volatility of the underlying stock, the expected dividend rate, the estimated forfeiture rate and an estimated life of each option. We do not expect any forfeiture of option grants; therefore, the compensation expense has not been reduced for estimated forfeitures. These assumptions are based on historical trends and estimated future actions of option holders and may not be indicative of actual events, which may have a material impact on our financial statements. For further details on share-based compensation expense, see Note 5 – Shareholders’ Equity to the accompanying financial statements.
Recently Adopted and Issued Accounting Pronouncements
See Note 1 – Presentation of Interim Information to the accompanying financial statements for recently adopted and issued accounting pronouncements.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Forward-looking statements include, among others, statements we make regarding:
● | · | material changes to unrecognized tax positions; |
material changes to unrecognized tax positions;
| · | the impact of new accounting pronouncements; |
● | · | our intent to sell certain farms in due course and hold the related mineral interest for future development; |
the impact of new accounting pronouncements;
| · | receipt of the first priority payout under the CAA; |
● | · | the timing and impact on our financial statements of new home construction and other development in the areas where we may sell our water; |
our intent to sell certain held for sale farms;
| · | utilization of our water assets; |
●
receipt of the first priority payout under the CAA;
●
the timing and impact on our financial statements of new home construction and other development in the areas where we may sell our water;
●
utilization of our water assets;
●
growth in our targeted service area;
●
plans to continue to provide water and wastewater services to commercial and industrial customers;
●
plans to finalize designs for Sky Ranch and the components of such designs;
●
sufficiency of our working capital to fund our operations for the next fiscal year and to fund improvements needed to deliver finished lots to home builders at Sky Ranch;
●
the potential for frack water sales;
●
our ability to meet the demands of water at Sky Ranch and for frack water;
●
consistency of director compensation;
●
deferred recognition of water tap and construction fee revenue from Arapahoe County;
●
costs associated with the use of the ECCV system;
●
infrastructure to be constructed over the next several years;
●
investments over the next five years for the WISE project;
●
estimated transmission pipeline capacity of, and decreed amount of water from, the WISE project upon its completion;
●
estimates associated with revenue recognition, asset impairments, and cash flows from our water assets;
●
variance in our estimates of future tap fees and future operating costs;
●
estimated number of SFE connections that can be served by our water systems;
●
number of new water connections necessary to recover costs;
●
continued expenses related to discontinued operations;
●
expected vesting and forfeitures of stock options;
●
objectives of our investment activities;
●
timing of the recognition of income related to the Rangeview Lease and
●
timing of the recognition of income related to the O&G Lease.
| · | growth in our targeted service area; |
| · | plans to continue to provide water and wastewater services to commercial and industrial customers; |
| · | projected capital spendings and projected gross proceeds and margin on lot sales for the first phase of Sky Ranch; |
| · | timing of delivery of finished lots at Sky Ranch; |
| · | sufficiency of our working capital to fund our operations for the next 12 months; |
| · | our ability to fund improvements needed to deliver finished lots to home builders at Sky Ranch by phasing construction and delivery of lots and utilizing progress payments from builders; |
| · | consistency of director compensation; |
| · | costs associated with the use of the ECCV system; |
| · | infrastructure to be constructed over the next several years; |
| · | investments over the next five years for the WISE project; |
| · | estimated transmission pipeline capacity of, and decreed amount of water from, the WISE project upon its completion; |
| · | estimates associated with revenue recognition, asset impairments, and cash flows from our water assets; |
| · | variance in our estimates of future tap fees and future operating costs; |
| · | estimated number of SFE connections that can be served by our water systems; |
| · | number of new water connections necessary to recover costs; |
| · | expected vesting and forfeitures of stock options; |
| · | timing and type of continued expenses related to the discontinued agricultural operations; |
| · | anticipated refund of a collateral deposit paid to the Southeast Metro Stormwater Authority; |
| · | objectives of our investment activities; and |
| · | timing of the recognition of income related to the Bison Lease. |
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:
● | · | the timing of new home construction and other development in the areas where we may sell our water; |
the timing of new home construction and other development in the areas where we may sell our water;
| · | timing of oil and natural gas development in the areas where we sell our water; |
● | · | general economic conditions; |
employment rates;
| · | the market price of water; |
● | · | the market price of oil and natural gas; |
timing of oil and natural gas development in the areas where we sell our water;
| · | changes in customer consumption patterns; |
● | · | changes in applicable statutory and regulatory requirements; |
general economic conditions;
| · | changes in governmental policies and procedures; |
● | · | uncertainties in the estimation of water available under decrees; |
the market price of water;
| · | uncertainties in the estimation of costs of delivery of water and treatment of wastewater; |
● | · | uncertainties in the estimation of the service life of our systems; |
the market price of oil and natural gas;
| · | uncertainties in the estimation of costs of construction projects; |
● | · | the strength and financial resources of our competitors; |
changes in customer consumption patterns;
| · | our ability to find and retain skilled personnel; |
● | · | climatic and weather conditions, including floods, droughts and freezing conditions; |
changes in applicable statutory and regulatory requirements;
● | · | turnover of elected and appointed officials and delays caused by political concerns and government procedures; |
changes in governmental policies and procedures;
| · | availability and cost of labor, material and equipment; |
● | · | delays in anticipated permit and construction dates; |
uncertainties in the estimation of water available under decrees;
| · | engineering and geological problems; |
● | · | environmental risks and regulations; |
uncertainties in the estimation of costs of delivery of water and treatment of wastewater;
| · | our ability to raise capital; |
● | · | volatility in the price of our common stock; |
uncertainties in the estimation of the service life of our systems;
| · | our ability to negotiate contracts with new customers; |
● | · | the outcome of any litigation and arbitration proceedings; |
uncertainties in the estimation of costs of construction projects;
| · | uncertainties in water court rulings; |
● | · | our ability to collect on any judgments; and |
the strength and financial resources of our competitors;
●
our ability to find and retain skilled personnel;
●
climatic and weather conditions, including floods, droughts and freezing conditions;
●
turnover of elected and appointed officials and delays caused by political concerns and government procedures;
●
availability and cost of labor, material and equipment;
●
delays in anticipated permit and construction dates;
●
engineering and geological problems;
●
environmental risks and regulations;
●
our ability to raise capital;
●
volatility in the price of our common stock;
●
our ability to negotiate contracts with new customers;
●
the outcome of any litigation and arbitration proceedings;
●
uncertainties in water court rulings;
●
our ability to collect on any judgments; and
●
the factors described under “Risk Factors” in our 2016 Annual Report.
| · | factors described under “Risk Factors” in our 2017 Annual Report. |
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified by these cautionary statements.
Item 3.32Quantitative and Qualitative Disclosures About Market Risk
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
General
We have limited exposure to market risks from instruments that may impact the Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income (Loss), and Consolidated Statements of Cash Flows.Such exposure is due primarily to changing interest rates.
Interest Rates
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in diversified short-term interest-bearing investments. As of May 31, 2017,2018, we own 51five certificates of deposit and 11 U. S. Treasury securities with a stated maturity dates and locked interest rates. Therefore, we are not subject to interest rate fluctuations. We have no investments denominated in foreign currencies; therefore, our investments are not subject to foreign currency exchange rate risk.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosures. The President and Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of May 31, 2017,2018, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
PART II – OTHER INFORMATION
Item 6.Exhibits
Exhibit No. Number | Description |
| |
| Description
|
3.1 | | Articles of Incorporation of the Company. Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on December 14, 2007.2007. |
| |
| | Bylaws of the Company. Incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A filed on December 14, 2007.2007. |
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| Eleventh Amendment to Contract for Purchase and Sale of Real Estate, dated March 27, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. * |
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| Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 10, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. * |
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| Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 20, 2018, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc. * |
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| | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
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| | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** |
101.INS | |
101.INS | XBRL Instance Document. * |
101.SCH | |
101.SCH | XBRL Taxonomy Extension Schema Document. * |
101.CAL | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. * |
101.DEF | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. * |
101.LAB | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. * |
101.PRE | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. * |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
PURE CYCLE CORPORATION
PURE CYCLE CORPORATION |
/s/ Mark W. Harding | |
By: | /s/ Mark W. Harding
|
| Mark W. Harding |
| President and Chief Financial Officer |
|
July 6, 2018 |
July 7, 2017