| LONG-TERM OBLIGATIONS AND OPERATING LEASE | The Participating
Interests in Export Water Supply is and prior to the Companys settlement, the TPF payable to HP A&M was an obligation
of the Company that had no scheduled maturity date. Therefore, these liabilities are not disclosed in tabular format, but they
are described below. Participating
Interests in Export Water Supply The Company
acquired its Rangeview Water Supply through various amended agreements entered into 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 Companys
Export Water (described in greater detail in Note 4 Water and Land Assets 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. If
the Company does not sell the Export Water, the holders of the Series B Preferred Stock 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 Supply From time
to time the Company repurchased various portions of the CAA obligations retaining their original priority. In July 2014, the Land
Board relinquished its approximately $2.4 million of CAA interests to the Company as part of the settlement of the 2011 lawsuit
filed by the Company and the District against the Land Board. As a result, during the fourth quarter of the fiscal year ended
August 31, 2014, the Company recorded a gain on the extinguishment of participating interests of the CAA of approximately $832,100.
The Company did not make any CAA acquisitions during the nine months ended May 31, 2015 or 2014. As a result
of the acquisitions, the relinquishment by the Land Board, and the sale of Export Water, as detailed in the table below, the remaining
potential third party obligation at May 31, 2015, is approximately $1 million, and the Company has the right to approximately
$29.8 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, 2014:
Acquisitions 28,077,500 (28,077,500 ) (9,790,000 ) (18,287,500 )
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 360,900 (262,200 ) (98,700 ) (34,300 ) (64,400 )
Balance at August
31, 2014 1,004,300 30,004,800 1,017,100 354,600 662,500
Fiscal 2015 activity:
Export
Water sale payments 184,200 (162,300 ) (21,900 ) (7,600 ) (14,300 )
Balance
at May 31, 2015 $ 1,188,500 $ 29,842,500 $ 995,200 $ 347,000 $ 648,200 * The Arapahoe
County tap fees are net of $34,522 in royalties paid to the Land Board. The CAA includes
contractually established priorities that call for payments to CAA holders in order of their priority. This means the first payees
receive their full payment before the next priority level receives any payment and so on until full repayment. The Company will
receive approximately $6 million of the first priority payout (the remaining entire first priority payout totals approximately
$6.8 million as of May 31, 2015). Arkansas
River Agreement Obligations As discussed
in Note 9 Litigation Loss Contingencies Initially
the obligation was to pay 10% of the Companys gross proceeds, or the equivalent thereof, from the sale of 40,000 water
taps sold after the date of the Arkansas River Agreement. The 40,000 water taps were eliminated as a result of (i) sales of Arkansas
River Valley land in 2006 and 2009; (ii) the sale of unutilized water rights owned by the Company in the Arkansas River Valley
in 2007; (iii) the election made by HP A&M, effective September 1, 2011, pursuant to the Arkansas River Agreement, to increase
the TPF percentage from 10% to 20%, and to take a corresponding 50% reduction in the number of taps subject to the TPF; (iv) the
allocation of 26.9% of the Net Revenues (defined as all lease and related income received from the farms less employee expenses,
direct expenses for managing the leases and a reasonable overhead allocation) received by HP A&M from management of the farm
leasing operations from September 1, 2011 to August 3, 2012 prior to termination of the Property Management Agreement; (v) the
reduction of 19,044 taps as the result of foreclosures on certain farms pursuant to the remedies outlined in the Arkansas River
Agreement (2,233 in fiscal year 2013, 15,010 in fiscal year 2014, and 1,801 in fiscal year 2015); and (vi) the settlement reached
with HP A&M in January 2015. The fair value
of the TPF liability through the date of the settlement was an estimate prepared by management of the Company. The fair value
of the liability was based on discounted estimated cash flows subject to the TPF calculated by projecting future annual water
tap sales for the number of taps subject to the TPF at the date of valuation. Future cash flows from water tap sales were estimated
by utilizing the following historical information, where available:
· New homes constructed
in the area known as the 11-county Front Range of Colorado from the 1980s through the valuation date;
· New home construction
patterns for large master planned housing developments along the Front Range;
· Population growth
rates for Colorado and the Front Range; and
· The Consumer Price
Index since the 1980s to project estimated future water tap fees. Utilizing
this historical information, the Company projected an estimated new home development pattern in its targeted service area sufficient
to cover the sale of the water taps subject to the TPF at the date of the revaluation, August 31, 2014. The estimated proceeds
generated from the sale of those water taps resulted in estimated payments to HP A&M over the life of the projected development
period of $2 million. The estimated payments to HP A&M were then discounted to the current valuation date, and the difference
between the amount reflected on the Companys balance sheet at the valuation date and the total estimated payments were
imputed as interest expense over the estimated development time using the effective interest method. The implied interest rate
for the most recent valuation was 3.4%. As of August
31, 2014, 2,184 taps (approximately $7.9 million of the TPF) remained subject to the TPF. HP A&M
relinquished all rights to the TPF pursuant to the settlement agreement the Company reached during January 2015. As a result,
the TPF was eliminated during the three months ended February 28, 2015. The Company recorded the decreases in the TPF payable
as an equity transaction due to the related party nature of the original transaction of approximately $6.2 million in the three
months ended November 30, 2014 and the remaining approximately $1.7 million upon final settlement. For a more detailed
discussion of the valuation of the TPF, see Note 7 Long-Term Debt and Operating Lease Litigation and Loss Contingencies Promissory
Notes Payable As a result
of HP A&Ms default and the Companys settlement with HP A&M, the Company has certain notes totaling approximately
$5.8 million, including accrued interest of $34,100 as of May 31, 2015 attributable to its farms. The Company borrowed
$4,450,000 from the First National Bank of Las Animas in exchange for a note that has a 20 year term commencing October 27, 2014,
requires semi-annual payments, and carries a 5.27% per annum interest rate for the first five years. The note is secured
by a total of 3,596.8 acres, and 4,369.4 FLCC shares. After the first five years, the interest rate on the note is
subject to change (no more often than annually) based on the changes in the First National Bank of Las Animas Ag/Commercial Real
Estate Rate. The Company may pay the note in full at any time without penalty. Additionally, the Company
has 16 mortgages for an aggregate total of approximately $1,350,000, which have five-year terms, require semi-annual payments,
and carry a 5% per annum interest rate. These notes are secured by a total of 3,860.9 acres, and 4,793 FLCC shares. The amount
owed on the Companys notes is approximately $5.6 million, including accrued interest of $34,100, and approximately $5 million,
including accrued interest of $80,800, at May 31, 2015 and August 31, 2014, respectively. Future
Maturities
Mortgage
notes payable, mainly bear interest at 5%, 5-year term; one note in amount of $4.45 million has 20-year term $ 5,586,200
Less:
current portion (848,300 )
Total
long-term mortgage payable $ 4,737,900
Future long-term
maturities
2016 578,600
2017 369,000
2018 166,200
2019 157,100
2020 169,800
Post
2020 3,297,200
Total $ 4,737,900 WISE
Partnership During December
2014, the Company, through the District, 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 the District 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 members 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. 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 the District, the Company
has an agreement to fund the Districts participation in WISE effective as of December 22, 2014. The Companys cost
of funding the Districts purchase of its share of existing infrastructure and future infrastructure for WISE is projected
to be approximately $7 million over the next five years, which includes funding of approximately $1.2 million annually over the
next five years and funding of the Districts obligations to repay approximately $1.4 million borrowed by the District from
certain SMWA members to finance the purchase of infrastructure for WISE pursuant to an agreement dated November 19, 2014 (the
Rangeview Funding Agreement). The $1.4 million is repayable in equal annual installments over the next three years
and accrues interest at the rate of 3% and is recorded in WISE Funding Obligation and in Investments in Water and Water Systems
on the Companys consolidated balance sheet. Operating
Lease Effective
January 2015, the Company entered into an operating lease for approximately 2,500 square feet of office and warehouse space. The
lease has a one-year term with payments of $3,000 per month. |
