PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Nine Months Ended May 31,
|
|
|
|
Cash flows from operating activities:
|
|
|
Net loss
|
$
(790,510
)
|
$
(45,440
)
|
Adjustments to reconcile net loss to net cash
|
|
|
used in operating activities:
|
|
|
Depreciation and depletion
|
307,834
|
258,909
|
Investment in Well Enhancement Recover Systems, LLC
|
8,004
|
1,565
|
Stock-based compensation expense
|
167,061
|
186,296
|
Interest income and other non-cash items
|
(37,299
)
|
(315
)
|
Interest added to receivable from related parties
|
(22,503
)
|
(10,812
)
|
Changes in operating assets and liabilities:
|
|
|
Trade accounts receivable
|
248,731
|
1,452,996
|
Sky Ranch receivable
|
-
|
(83,500
)
|
Prepaid expenses
|
(145,826
)
|
63,997
|
Notes receivable - related parties
|
(26,483
)
|
(95,500
)
|
Accounts payable and accrued liabilities
|
(486,170
)
|
(1,115,206
)
|
Income taxes
|
(292,729
)
|
-
|
Deferred revenues
|
(41,852
)
|
(49,037
)
|
Deferred oil and gas lease payment
|
(354,765
)
|
(484,290
)
|
Net cash provided by (used in) operating activities from continuing operations
|
(1,466,507
)
|
79,663
|
Net cash provided by (used in) operating activities from discontinued operations
|
1,251,527
|
(535,274
)
|
Net cash used in operating activities
|
(214,980
)
|
(455,611
)
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of short-term investments
|
(23,142,484
)
|
-
|
Purchase of long-term investments
|
(7,026,424
)
|
-
|
Investments in water, water systems, and land
|
(695,746
)
|
(1,900,267
)
|
Purchase of property and equipment
|
(441,768
)
|
(17,186
)
|
Net cash used in investing activities from continuing operations
|
(31,306,422
)
|
(1,917,453
)
|
Net cash provided by (used in) investing activities from discontinued operations
|
(451,347
)
|
699,826
|
Net cash used in investing activities
|
(31,757,769
)
|
(1,217,627
)
|
|
|
|
Cash flows from financing activities:
|
|
|
Payments to contingent liability holders
|
(1,629
)
|
(7,642
)
|
Net cash used in financing activities from continuing operations
|
(1,629
)
|
(7,642
)
|
Net cash provided by financing activities from discontinued operations
|
-
|
674,710
|
Net cash (used in) provided by financing activities
|
(1,629
)
|
667,068
|
Net change in cash and cash equivalents
|
(31,974,378
)
|
(1,006,170
)
|
Cash and cash equivalents – beginning of period
|
37,089,041
|
1,749,558
|
Cash and cash equivalents – end of period
|
$
5,114,663
|
$
743,388
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLSOURES OF NON-CASH ACTIVITIES
|
|
|
Retirement of collateral stock
|
$
1,407,000
|
$
-
|
Net reduction in Tap Participation Fee liability and HP A&M
|
|
|
receivable collateral stock and mineral rights received as
|
|
|
result of settlement of the Arkansas River Agreement
|
$
-
|
$
1,894,203
|
Assets acquired through WISE funding obligation
|
$
-
|
$
1,400,000
|
See accompanying Notes to Consolidated Financial Statements
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
NOTE 1 – PRESENTATION OF INTERIM INFORMATION
The May 31, 2016 consolidated balance sheet, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended May 31, 2016 and 2015, the consolidated statement of shareholders’ equity for the nine months ended May 31, 2016, and the consolidated statements of cash flows for the nine
months ended May 31, 2016 and 2015 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited.
The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2016, and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2015 (the “2015 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2015. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full fiscal year. The August 31, 2015 balance sheet was taken from the Company’s audited financial statements and was modified to reflect
the discontinued operations presentation of the Company’s agricultural segment.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution. At various times during the three and nine months ended May 31, 2016, the Company’s main operating
account exceeded federally insured limits. The Company has never suffered a loss due to such excess balance.
Investments
M
anagement determines the appropriate classification of its investments in certificates of deposit and debt and equity securities at the time of purchase and reevaluates such determinations each reporting period.
Certificates of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company has $7,034,100 of investments classified as held-to-maturity at May 31, 2016 which represent certificates of deposit and U.S. treasury notes with maturity
dates after May 31, 2017. Debt securities for which the Company does not have the positive intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value on such securities are recorded as a component of
Accumulated other comprehensive income (loss).
The
cost of securities sold is based on the specific identification method. The Company’s debt securities mature at various dates through February 12, 2018.
Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, commercial paper obligations, corporate bonds and U.S. government treasury obligations. To date, the Company has not experienced
significant losses on any of these investments.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
Cash and Cash Equivalents –
The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash
equivalents approximate fair value.
Trade Accounts Receivable –
The Company records accounts receivable net of allowances for uncollectible accounts.
Investments –
The carrying amounts of investments approximate fair value. Investments are described further in Note 2 –
Fair Value Measurements.
Accounts Payable –
The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.
Long-Term Financial Liabilities
–
The Comprehensive Amendment Agreement No. 1 (the “CAA”) is comprised of a recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview
Water Supply” (defined in Note 4 –
Water and Land Assets
to the 2015 Annual Report). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined in Note 4 –
Water and Land Assets
to the 2015 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have
a determinable fair value. The CAA is described further in Note 4 –
Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply
.
Notes Receivable – Related Parties
–
The market value of the notes receivable – related parties: Rangeview Metropolitan District (the “District”) and Sky Ranch Metropolitan District No. 5 are not practical to estimate due to the related party
nature of the underlying transactions.
Off-Balance Sheet Instruments –
The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent
portion of the CAA does not have a determinable fair value. See further discussion in Note 4 –
Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply
.
Revenue
Recognition
Wholesale Water and Wastewater Fees –
Monthly wholesale water usage charges are assessed to the Company’s customers based on actual metered usage each month plus a base monthly service fee. The Company recognizes wholesale water usage revenues
upon delivering
water to its customers or its governmental customer’s end-use customers, as applicable. The export water revenues recognized by the Company are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). The on-site water revenues recognized by the Company are shown net of royalties paid to the Land Board and amounts retained by the District. The Company recognized $35,700 and $73,500 of metered water usage revenues during the three months ended May 31,
2016 and 2015, respectively. The Company recognized $119,800 and $893,700 of metered water usage revenues during the nine months ended May 31, 2016 and 2015, respectively.
The Company recognizes wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts retained by the District. The Company recognized $10,500 and $12,300 of wastewater treatment fees during the three months ended May 31, 2016 and 2015, respectively. The Company recognized $31,500 and $37,200 of wastewater
treatment fees during the nine months ended May 31, 2016 and 2015, respectively. Costs of delivering water and providing wastewater services to customers are recognized as incurred.
Tap and Construction Fees
– The Company has various water and wastewater service agreements, a component of which may include tap and construction fees. The Company recognizes water tap fees as revenue ratably over the estimated service period upon
completion of the “Wholesale Facilities” (defined in Part I, Item 1 of the 2015 Annual Report) constructed to provide service to Arapahoe County, Colorado (the “County”). The Company recognized $3,600 and $10,700 of water tap fee revenues during each of the three and nine months ended May 31, 2016 and 2015, respectively. The water tap fees to be recognized over this period are net of the royalty payments to the Land Board and amounts paid to third parties pursuant to the CAA
as further described in Note 4 –
Long-Term Obligations and Operating Lease
below.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
The Company recognized $10,400 and $31,100 of “Special Facilities” (defined in Part I, Item 1 of the 2015 Annual Report) funding as revenue during each of the three and nine months ended May 31, 2016 and 2015, respectively. This is the ratable portion of the Special Facilities funding proceeds received from water
agreements as more fully described in Note 2 –
Summary of Significant Accounting Policies
to the 2015 Annual Report.
As of May 31, 2016, and August 31, 2015, the Company has deferred recognition of approximately $1,125,200 and $1,167,100, respectively, of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described
above.
Royalty and Other Obligations
Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the “Lowry Range” (described in Note 4 –
Water and Land Assets
in Part II,
Item 8 of the 2015 Annual Report) are shown net of the royalties to the Land Board and the amounts retained by the District.
Oil and Gas Lease Payments
As further described in Note 2 –
Summary of Significant Accounting Policies
in Part II, Item 8 of the 2015 Annual Report, in March 2011, the Company entered into a Paid-Up Oil and Gas Lease (the “O&G
Lease”) and a Surface Use and Damage Agreement (the “Surface Use Agreement”) which was subsequently purchased by a wholly owned subsidiary of ConocoPhillips Company. Pursuant to the O&G Lease, during the year ended August 31, 2011, the Company received an up-front payment of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate owned by the Company at its “Sky Ranch” property (described in Note 4 –
Water
and Land Assets
to the 2015 Annual Report). The Company began recognizing the up-front payments as income on a straight-line basis over three years (the initial term of the O&G Lease) on March 10, 2011. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which was recognized as income on a straight-line basis over two years (the extension term of the O&G Lease).
During the fiscal year ended August 31, 2014, the Company 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 the Company owns adjacent to the Lowry Range (the “Rangeview Lease”). The Company recognized $31,900 and $161,400 during the three months ended May 31, 2016 and 2015, respectively, of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease.
The Company recognized $354,800 and $484,300 during the nine months ended May 31, 2016 and 2015, respectively, of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease.
As of May 31, 2016 and August 31, 2015, the Company has deferred recognition of $25,000 and $379,800, respectively, of income related to the O&G Lease and the Rangeview Lease. The balance as of May 31, 2016 will be recognized into income ratably through July 2017. $354,800 of the balance as of August 31, 2015 was recognized into income during
the nine months ended May 31, 2016.
During the three months ended February 28, 2015, two wells were drilled within the Company’s mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to the Company. 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. During the three months ended May 31, 2016 and 2015, the Company receiv
ed $76,400 and $262,100, respectively, in royalties attributable to these two wells. During the nine months ended May 31, 2016 and 2015, the Company received $271,000 and $262,100 respe
ctively, in royalties attributable to these two wells.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the
eventual use of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
Capitalized Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes
certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.
Share-Based Compensation
The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the
award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options has no impact on the income tax provisions. The Company recognized $58,200 and $53,700 of share-based compensation expense during the three months ended May 31,
2016 and 2015, respectively. The Company recognized $167,100 and $186,300 of share-based compensation expense during the nine months ended May 31, 2016 and 2015, respectively.
Income Taxes
The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of May 31, 2016.
The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal year 2013 through fiscal year 2015. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At May 31, 2016, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three or nine months ended May
31, 2016 or 2015.
Discontinued Operations
In August 2015, the Company sold its Arkansas River water and land properties. Pursuant to the terms of the purchase and sale agreement, the Company continued to manage and receive the lease income until December 31, 2015. The operating results and the assets and liabilities of the discontinued operations, which formerly comprised the agricultural
segment, are presented separately in the Company’s Consolidated Financial Statements. Summarized financial information for the discontinued agricultural business is shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued operation.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
Discontinued Operations Income Statement
|
|
|
|
|
|
|
Three Months Ended May 31,
|
Nine Months Ended May 31,
|
|
|
|
|
|
Farm revenues
|
$
-
|
$
270,582
|
$
275,991
|
$
818,925
|
Farm expenses
|
(22,674
)
|
(23,131
)
|
(56,042
)
|
(70,001
)
|
Gross (loss) profit
|
(22,674
)
|
247,451
|
219,949
|
748,924
|
|
|
|
|
|
General and administrative expenses
|
48,346
|
140,366
|
287,787
|
617,914
|
Operating (loss) profit
|
(71,020
)
|
107,085
|
(67,838
)
|
131,010
|
Finance charges
|
9,757
|
7,909
|
42,054
|
17,622
|
Gain on sale of farm assets
|
-
|
-
|
4,273
|
-
|
Interest expense
|
-
|
(78,779
)
|
-
|
(221,915
)
|
Interest imputed on the Tap Participation
|
|
|
|
|
Fee payable to HP A&M
|
-
|
-
|
-
|
(23,816
)
|
Income (loss) from discontinued operations
|
$
(61,263
)
|
$
36,215
|
$
(21,511
)
|
$
(97,099
)
|
The Company anticipates continued expenses through the end of calendar 2016 related to the discontinued operations. The Company will continue to incur expenses related to the remaining agricultural land the Company continues to own and for the purpose of collecting outstanding receivables.
The individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued operation” and “Liabilities of discontinued operation” in the consolidated Balance Sheet. The carrying amounts of the major classes of assets and liabilities included part of the discontinued
business are presented in the following table:
Discontinued Operations Balance Sheet
|
|
|
|
|
|
|
Assets:
|
|
|
Trade accounts receivable
|
$
351,218
|
$
307,913
|
Escrow receivable
|
-
|
1,342,250
|
Land held for sale (*)
|
450,347
|
-
|
Prepaid expenses
|
-
|
65,309
|
Total assets
|
$
801,565
|
$
1,715,472
|
|
|
|
Liabilities:
|
|
|
Accounts payable
|
$
135
|
$
25,704
|
Accrued liabilities
|
3,467
|
90,725
|
Deferred revenues
|
-
|
900
|
Total liabilities
|
$
3,602
|
$
117,329
|
(*) Land Held for Sale.
During the fiscal quarter ended November 30, 2015, the Company purchased three farms for approximately $450,300. The Company acquired a total of 700 acres. The farms were acquired in order to correct dry-up covenant issues related
to water only farms in order 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 within the next fiscal year.
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 338,100 and 341,100 common share equivalents were outstanding as of May 31, 2016 and 2015, respectively, and have been included in the calculation of net income
per common share but excluded from the calculation of loss per common share as their effect is anti-dilutive.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
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 May 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,
Revenue from Contracts with Customers
, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity
should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The Company is assessing the impact of ASU 2016-12, but it does not expect the adoption of ASU 2016-12 to have a material impact on its financial statements.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
.
ASU 2016-10 provides for amendments to ASU No. 2014-09,
Revenue from Contracts with
Customers,
reducing the complexity when applying the guidance for identifying performance obligations and improving the operability and understandability of the license implementation guidance. The Company is assessing the impact of ASU 2016-10, but it does not expect the adoption of ASU 2016-10 to have a material impact on its financial statements.
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 assessing the impact of ASU 2016-08, but it does not expect
the adoption of ASU 2016-08 to have a material impact on its 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.
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 fair value.
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had none of these instruments as of May 31, 2016 or August 31, 2015.
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 35 Level 2 assets as of May 31, 2016, which consist of certificates of deposit and U.S. treasury notes.
The
Company had no Level 2 assets or liabilities as of August 31, 2015.
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 no Level 3 liability as of May 31, 2016 or August 31, 2015.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.
Level 2 Asset – Available for Sale Securities.
The Company’s available for sale securities are the Company’s only financial asset measured at fair value on a recurring basis.
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.
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, 2016
:
|
|
|
Fair Value Measurement Using:
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
Accumulated Unrealized Gains and
|
|
|
|
|
|
|
|
Available for sale
|
$
23,148,500
|
$
23,171,800
|
$
-
|
$
23,148,500
|
$
-
|
$
(23,300
)
|
NOTE 3 – WATER AND LAND ASSETS
The Company’s water rights and current water and wastewater service agreements are more fully described in Note 4 –
Water and Land Assets
in Part II, Item 8 of the 2015 Annual Report. There have been
no significant changes to the Company’s water rights or water and wastewater service agreements during the three and nine months ended May 31, 2016.
The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at May 31, 2016 and August 31, 2015:
|
|
|
|
|
Accumulated Depreciation and Depletion
|
|
Accumulated Depreciation and Depletion
|
Rangeview water supply
|
$
14,444,600
|
$
(9,000
)
|
$
14,444,600
|
$
(8,800
)
|
Sky Ranch water rights and other costs
|
6,444,500
|
(268,000
)
|
6,440,800
|
(194,600
)
|
Fairgrounds water and water system
|
2,899,900
|
(864,800
)
|
2,899,900
|
(798,700
)
|
Rangeview water system
|
1,256,300
|
(141,400
)
|
1,256,300
|
(110,300
)
|
Water supply – other
|
4,479,000
|
(271,900
)
|
3,973,300
|
(193,900
)
|
Totals
|
29,524,300
|
(1,555,100
)
|
29,014,900
|
(1,306,300
)
|
Net investments in water and water systems
|
$
27,969,200
|
|
$
27,708,600
|
|
Capitalized terms in this section not defined herein are defined in Note 4 –
Water and Land Assets
to the 2015 Annual Report.
Depletion and Depreciation.
The Company recorded depletion charges of $100 and $500 during the three months ended May 31, 2016 and 2015, respectively. The Company recorded depletion charges of $200 and $6,700 during the nine months ended May 31, 2016 and
2015, respectively. During the three and nine months ended May 31, 2016, this related entirely to the Rangeview Water Supply, and during the three and nine months ended May 31, 2015, this related to the Rangeview Water Supply and the Sky Ranch water assets.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
The Company recorded $108,700 and $86,300 of depreciation expense during the three months ended May 31, 2016 and 2015, respectively. The Company recorded $307,600 and $252,200 of depreciation expense during the nine months ended May 31, 2016 and 2015, respectively.
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 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 Company’s Export Water (described in greater detail in Note 4 –
Water and Land Assets
to the 2015 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. 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
liability
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.
From time to time, the Company repurchased various portions of the CAA obligations, which retained their original priority. The Company did not make any CAA acquisitions during the nine months ended May 31, 2016 or 2015.
As a result of the acquisitions and the sale of Export Water, as detailed in the table below, the remaining potential third-party obligation at May 31, 2016, is approximately $1 million, and the Company has the right to approximately $29.8 million in Export Water proceeds:
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
|
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
|
–
|
30,428,900
|
(30,428,900
)
|
(10,622,100
)
|
(19,806,800
)
|
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
|
569,200
|
(445,800
)
|
(123,400
)
|
(42,900
)
|
(80,500
)
|
Balance at August 31, 2015
|
1,212,600
|
29,786,200
|
1,027,400
|
346,000
|
681,400
|
Fiscal 2016 activity:
|
|
|
|
|
|
Export Water sale payments
|
39,300
|
(34,600
)
|
(4,700
)
|
(1,600
)
|
(3,100
)
|
Balance at May 31, 2016
|
$
1,251,900
|
$
29,751,600
|
$
1,022,700
|
$
344,400
|
$
678,300
|
* 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 $6.7 million as of May 31, 2016).
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 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.
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 District’s participation in
WISE effective as of December 22, 2014. The Company’s cost of funding the District’s purchase of its share of existing infrastructure and future infrastructure for WISE is projected to be approximately $5.8 million over the next five years. See further discussion in Note 6
–
Related Party Transactions.
Operating Lease
Effective January 2016, 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.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
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, 2016:
|
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Contractual Term
|
Approximate Aggregate Instrinsic Value
|
Oustanding at August 31, 2015
|
312,000
|
$
6.61
|
|
|
Granted
|
36,000
|
4.26
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited or expired
|
(10,000
)
|
13.25
|
|
|
Outstanding at May 31, 2016
|
338,000
|
$
4.77
|
5.94
|
$
185,660
|
|
|
|
|
|
Options exercisable at May 31, 2016
|
268,667
|
$
4.70
|
5.42
|
$
177,360
|
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, 2016:
|
|
Weighted-Average Grant Date Fair Value
|
Non-vested options oustanding at August 31, 2015
|
59,333
|
$
4.59
|
Granted
|
36,000
|
-
|
Vested
|
(26,000
)
|
-
|
Forfeited
|
-
|
-
|
Non-vested options outstanding at May 31, 2016
|
69,333
|
$
5.04
|
All non-vested options are expected to vest.
Stock-based compensation expense was $58,200 and $53,700 for the three months ended May 31, 2016 and 2015, respectively. Stock-based compensation expense was $167,100 and $186,300 for the nine months ended May 31, 2016 and 2015, respectively.
At May 31, 2016, the Company had unrecognized expenses relating to non-vested options that are expected to vest totaling $104,200, which options have a weighted average life of less than three years. The Company has not recorded any excess tax benefits to additional paid-in capital.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
NOTE 6 – RELATED PARTY TRANSACTIONS
On December 16, 2009, the Company entered into a Participation Agreement with the District, whereby the Company agreed to provide funding to the District in connection with the District joining the South Metro Water Supply Authority (“SMWSA”). On November 10, 2014, the Company and the District entered into the WISE Financing Agreement,
whereby the Company agreed to fund the District’s cost of participating in a regional water supply project known as the WISE partnership. The Company anticipates investing approximately $1.2 million per year for each of the next five years for additional payments for the water transmission line and additional facilities, water and related assets for the WISE project.
In 1995, the Company extended a loan to the District, a related party. The loan provided for borrowings of up to $250,000, is unsecured, bears interest based on the prevailing prime rate plus 2% (5.25% at May 31, 2016) and the maturity date of the loan is December 31, 2020. Beginning in January 2014, the District and the Company entered
into a funding agreement that allows the Company to continue to provide funding to the 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 $619,200 balance of the note receivable at May 31, 2016, includes borrowings of $255,000 and accrued interest of $364,200.
In November 2015, but effective as of January 1, 2014, the Company entered into a funding agreement obligating the Company to provide funding to Sky Ranch Metropolitan District No. 5, a related party, for calendar years 2014 and 2015 up to a maximum amount of $350,000. The funding was accrued into a note that bears interest at a rate of 6% per
annum. No payments are due for a minimum of five years after the date of borrowing. The funding relates to costs associated with establishing and operating the district. The Company anticipates repayment of the note through future revenues from property tax assessments. The $169,400 balance of the note receivable at May 31, 2016, includes borrowings of $156,900 and accrued interest of $12,500. Upon the execution of the note, the amount was reclassified to long-term and is recorded as part of Notes Receivable
– related parties.
NOTE 7 – SIGNIFICANT CUSTOMERS
The Company sells wholesale water and wastewater services to the District pursuant to the Rangeview Water Agreements (defined in Note 4 –
Water and Land Assets
to the 2015 Annual Report). Sales to the District accounted
for 78% and 48% of the Company’s total water and wastewater revenues for the three months ended May 31, 2016 and 2015, respectively. Sales to the District accounted for 77% and 13% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2016 and 2015, respectively. The District has one significant customer. Pursuant to the Rangeview Water Agreements, the Company is providing water and wastewater services to this customer on behalf of the District. The District’s
significant customer accounted for 63% and 40% of the Company’s total water and wastewater revenues for the three months ended May 31, 2016 and 2015, respectively. The District’s significant customer accounted for 66% and 11% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2016 and 2015, respectively.
Revenues related to the provision of water for the oil and gas industry to one customer accounted for 46% and 83% of the Company’s water and wastewater revenues for the three and nine months ended May 31, 2015, 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 District which accounted for 88% and 87% of the Company’s wholesale water and wastewater trade receivables balances at May 31, 2016 and August 31, 2015, respectively. Accounts receivable from the District’s largest customer accounted for 73% and 76% of the Company’s water and wastewater
trade receivables as of May 31, 2016 and August 31, 2015, respectively.
NOTE 8 – ACCRUED LIABILITIES
At May 31, 2016, the Company had accrued liabilities of $86,500, of which $3,600 was for estimated property taxes, $51,400 was for professional fees, and $31,500 was for operating payables.
At August 31, 2015, the Company had accrued liabilities of $499,800, of which $400,000 was for accrued compensation, $4,800 was for estimated property taxes, $52,500 was for professional fees and the remaining $42,500 was related to operating payables.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2016
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.
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; and (ii) the agricultural farming business. The Company has discontinued its agricultural farming operations. The Company
will continue to operate its wholesale water and wastewater services segment as its only line of business. The wholesale water and wastewater services business includes selling to customers using water rights owned by the Company and to develop infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater.