PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Three
Months Ended November 30,
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net loss
|
$
(337,972
)
|
$
(97,541
)
|
Adjustments to reconcile net loss to net cash
|
|
|
used in operating activities:
|
|
|
Depreciation and depletion
|
115,668
|
94,571
|
Investment in Well Enhancement Recovery Systems, LLC
|
2,612
|
2,633
|
Stock-based compensation expense
|
42,795
|
53,690
|
Interest income and other non-cash items
|
(22,316
)
|
(105
)
|
Interest added to receivable from related parties
|
(12,476
)
|
(3,226
)
|
Changes in operating assets and liabilities:
|
|
|
Trade accounts receivable
|
(18,401
)
|
(51,332
)
|
Prepaid expenses
|
(28,354
)
|
60,860
|
Notes receivable - related parties
|
(4,999
)
|
-
|
Accounts payable and accrued liabilities
|
(9,723
)
|
(470,230
)
|
Income taxes
|
-
|
(292,729
)
|
Deferred revenues
|
(13,951
)
|
(13,951
)
|
Deferred oil and gas lease payment
|
(6,000
)
|
(161,430
)
|
Net cash provided by (used in) operating activities from continuing
operations
|
(293,117
)
|
(878,790
)
|
Net cash provided by (used in) operating activities from
discontinued operations
|
34,581
|
18,299
|
Net cash used in operating activities
|
(258,536
)
|
(860,491
)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Sale of short-term investments
|
1,424,473
|
-
|
Investments in water, water systems, and land
|
(265,371
)
|
(25,168
)
|
Purchase of property and equipment
|
(15,342
)
|
(248,866
)
|
Net cash provided by (used in) investing activities from continuing
operations
|
1,143,760
|
(274,034
)
|
Net cash used in investing activities from discontinued
operations
|
-
|
(443,620
)
|
Net cash provided by (used in) investing activities
|
1,143,760
|
(717,654
)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Payments to contingent liability holders
|
(1,543
)
|
(492
)
|
Net cash used in financing activities from continuing
operations
|
(1,543
)
|
(492
)
|
Net cash provided by financing activities from discontinued
operations
|
-
|
-
|
Net cash (used in) provided by financing activities
|
(1,543
)
|
(492
)
|
Net
change in cash and cash equivalents
|
883,681
|
(1,578,637
)
|
Cash
and cash equivalents – beginning of period
|
4,697,288
|
37,089,041
|
Cash
and cash equivalents – end of period
|
$
5,580,969
|
$
35,510,404
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLSOURES OF NON-CASH ACTIVITIES
|
|
|
Retirement of collateral stock
|
$
-
|
$
1,407,000
|
See
accompanying Notes to Consolidated Financial
Statements
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
NOTE 1 – PRESENTATION OF INTERIM
INFORMATION
The November 30, 2016 consolidated balance sheet, the consolidated
statements of operations and comprehensive income (loss) for the
three months ended November 30, 2016 and 2015, the consolidated
statement of shareholders’ equity for the three months ended
November 30, 2016, and the consolidated statements of cash flows
for the three months ended November 30, 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 November 30, 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, 2016 (the “2016 Annual
Report”) filed with the Securities and Exchange Commission
(the “SEC”) on October 28, 2016. The results of
operations for interim periods presented are not necessarily
indicative of the operating results for the full fiscal year. The
August 31, 2016 balance sheet was derived from the Company’s
audited consolidated financial statements.
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 months ended November 30, 2016, the
Company’s main operating account exceeded federally insured
limits. The Company has never suffered a loss due to such excess
balance.
Investments
Management determines the appropriate classification of its
investments in certificates of deposit and debt and equity
securities at the time of purchase and re-evaluates 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
$6,846,600
of investments classified as held-to-maturity at
November 30, 2016, which represent certificates of deposit and U.S.
treasury notes with maturity dates after November 30, 2017.
Certificates of deposit and debt securities that 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 certificates of
deposit and debt securities mature at various dates through
February 28, 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, certificates of deposit 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
NOVEMBER 30, 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 2016 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 2016 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 fair value of the notes receivable –
related parties from 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 water revenues recognized by the Company from
the sale of water on the “Lowry Range” (described in
Note 4 – Water and Land Assets in Part II, Item 8 of the 2016
Annual Report) are shown net of royalties paid to the Land Board
and amounts retained by the District
.
The Company recognized $141,100 and
$56,800 of metered water usage revenues during the three months
ended November 30, 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 $12,300
and $10,300 of wastewater treatment fees during the three months
ended November 30, 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 2016 Annual Report) constructed to
provide service to Arapahoe County, Colorado (the
“County”). The Company recognized $3,600 of water tap
fee revenues during each of the three months ended November 30,
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
NOVEMBER 30, 2016
The
Company recognized $10,400 of “Special Facilities”
(defined in Part I, Item 1 of the 2016 Annual Report)
funding as revenue during each of the three months ended November
30, 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 2016 Annual Report.
As of
November 30, 2016, and August 31, 2016, the Company has deferred
recognition of approximately $1,097,300 and $1,111,300,
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.
Consulting fees
– consulting fees are fees the Company
receives, typically on a monthly basis, from municipalities and
area water providers along the I-70 corridor, for contract
operations services.
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 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 2016 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
were 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 2016
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 $6,000 and $161,400 during each of the three months
ended November 30, 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
November 30, 2016 and August 31, 2016, the Company has deferred
recognition of $13,000 and $19,000, respectively, of income related
to the Rangeview Lease, which will be recognized into income
ratably through June 2017.
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
November 30, 2016 and 2015, the Company received $68,100 and
$122,100, respectively, 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
NOVEMBER 30, 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
$42,800 and $53,700 of share-based compensation expense during the
three months ended November 30, 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 November 30, 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 2014 through fiscal year 2016. 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 November 30, 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
months ended November 30, 2016 or 2015.
Discontinued Operations
In
August 2015, the Company sold substantially all of 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
NOVEMBER 30, 2016
Discontinued Operations Income Statement
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
Farm revenues
|
$
-
|
$
212,248
|
Farm expenses
|
-
|
(15,632
)
|
Gross (loss) profit
|
-
|
196,616
|
|
|
|
General and administrative expenses
|
19,626
|
171,902
|
Operating (loss) profit
|
(19,626
)
|
24,714
|
Finance charges
|
946
|
15,951
|
Interest expense
|
-
|
(1,605
)
|
Income (loss) from discontinued operations
|
$
(18,680
)
|
$
39,060
|
The
Company anticipates continued expenses through calendar 2017
related to the discontinued operations. The Company will continue
to incur expenses (including property taxes) 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
|
$
193,451
|
$
227,060
|
Land
held for sale (*)
|
453,182
|
450,347
|
Prepaid
expenses
|
720
|
2,880
|
Total
assets
|
$
647,353
|
$
680,287
|
|
|
|
Liabilities:
|
|
|
Accrued
liabilities
|
$
6,042
|
$
4,394
|
Total
liabilities
|
$
6,042
|
$
4,394
|
(*) Land
Held for Sale.
During the
fiscal quarter ended November 30, 2015, the Company purchased three
farms totaling 700 acres for approximately $453,200. 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 during fiscal year
2017.
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
448,100 and 312,100 co
mmon share
equivalents were outstanding as of November 30, 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
NOVEMBER 30, 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 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 expects to be entitled to the
exchange for those goods or services. The Company will adopt the
guidance on September 1, 2018. The Company does not expect the
adoption of the ASU to have a material impact on its wholesale
water and wastewater and consulting fees as the underlying
contracts with these customers are relatively straightforward and
contain no complex components. The Company is currently assessing
the impact of the ASU on its water and wastewater tap and
construction fees. The Company anticipates this assessment to be
completed in fiscal 2017.
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.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
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 November 30, 2016 or August 31,
2016.
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 61 and 36 Level 2 assets as of November 30, 2016 and August 31,
2016, respectively, which consist of certificates of deposit and
U.S. treasury 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
no Level 3 assets or liabilities as of November 30, 2016 or August
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 and U.S. treasury
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 November 30,
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
|
$
21,758,691
|
$
21,780,902
|
$
-
|
$
21,758,691
|
$
-
|
$
(22,211
)
|
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
2016 Annual Report. There have been no significant changes to the
Company’s water rights or water and wastewater service
agreements during the three months ended November 30,
2016.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
The Company’s Investments in Water and Water Systems consist
of the following costs and accumulated depreciation and depletion
at November 30, 2016 and August 31, 2016:
|
|
|
|
|
Accumulated
Depreciation and Depletion
|
|
Accumulated
Depreciation and Depletion
|
Rangeview
water supply
|
$
14,457,400
|
$
(9,600
)
|
$
14,444,600
|
$
(9,400
)
|
Sky
Ranch water rights and other costs
|
6,691,400
|
(361,400
)
|
6,607,400
|
(334,500
)
|
Fairgrounds
water and water system
|
2,899,800
|
(908,800
)
|
2,899,900
|
(886,800
)
|
Rangeview
water system
|
1,637,500
|
(166,300
)
|
1,624,800
|
(152,800
)
|
Water
supply – other
|
3,703,600
|
(323,600
)
|
3,703,000
|
(297,800
)
|
Construction
in progress
|
825,900
|
-
|
723,500
|
-
|
Totals
|
30,215,600
|
(1,769,700
)
|
30,003,200
|
(1,681,300
)
|
Net
investments in water and water systems
|
$
28,445,900
|
|
$
28,321,900
|
|
Capitalized
terms in this section not defined herein are defined in
Note 4 –
Water and
Land Assets
to the 2016 Annual Report.
Depletion and Depreciation.
The Company recorded depletion
charges of $300 and $100 during the three months ended November 30,
2016 and 2015, respectively. During the three months ended November
30, 2016, the depletion was related entirely to the Rangeview and
Sky Ranch water assets.
The
Company recorded $115,700 and 94,500 of depreciation expense during
the three months ended November 30, 2016 and 2015, 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 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 2016 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.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
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 reacquired various portions of the CAA
obligations, which retained their original priority. The Company
did not make any CAA acquisitions during the three months ended
November 30, 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 November 30, 2016, is approximately $1 million, and
the Company has the right to approximately $29.8 million in Export
Water proceeds:
|
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
|
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
|
37,200
|
(32,700
)
|
(4,500
)
|
(1,600
)
|
(2,900
)
|
Balance
at November 30, 2016
|
$
1,299,000
|
$
29,710,200
|
$
1,017,000
|
$
342,400
|
$
674,600
|
*
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 November 30, 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 and funding
operations and water deliveries related to WISE is projected to be
approximately $5.6 million over the next five years. See further
discussion in Note 6
–
Related Party
Transactions.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
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. The
Company intends to renew this lease in January 2017 on similar
terms.
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 three months
ended November 30, 2016:
|
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Approximate
Aggregate Instrinsic Value
|
Oustanding
at August 31, 2016
|
338,000
|
$
4.83
|
|
|
Granted
|
110,000
|
5.58
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
or expired
|
-
|
-
|
|
|
Outstanding
at November 30, 2016
|
448,000
|
$
4.97
|
6.52
|
$
267,540
|
|
|
|
|
|
Options
exercisable at November 30, 2016
|
302,000
|
$
4.83
|
5.11
|
$
242,680
|
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 three months ended November 30,
2016:
|
|
Weighted-Average
Grant Date Fair Value
|
Non-vested
options oustanding at August 31, 2016
|
36,000
|
$
2.89
|
Granted
|
110,000
|
3.73
|
Vested
|
-
|
-
|
Forfeited
|
-
|
-
|
Non-vested
options outstanding at November 30, 2016
|
146,000
|
$
3.52
|
All
non-vested options are expected to vest.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Stock-based
compensation expense was $42,800 and $53,700 for the three months
ended November 30, 2016 and 2015, respectively.
At
November 30, 2016, the Company had unrecognized expenses relating
to non-vested options that are expected to vest totaling $293,600,
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.
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 which become effective December 22, 2014,
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 spending approximately $5.6
million over the next five fiscal years to fund the
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.
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% (5.50% at
November 30, 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 $652,200 balance of the note
receivable at November 30, 2016, includes borrowings of $283,700
and accrued interest of $368,500.
Each year, beginning in 2012, the Company has entered into an
Operation Funding Agreement with Sky Ranch Metropolitan District
No. 5 obligating the Company to advance funding to the 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 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 Sky Ranch Metropolitan District No. 5 obligating the Company
to either finance district improvements or to construct
improvements on behalf of the 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.
The $165,600 balance of the receivable due pursuant to the
Operation Funding Agreements and the Facilities Funding and
Acquisition Agreement at November 30, 2016, includes advances of
$142,000 and accrued interest of $23,600. Upon the district’s
ratification of the advances and related expenditures, 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 2016 Annual Report).
Sales to the District accounted for
39% and 70% of the Company’s total water and wastewater
revenues for the three months ended November 30, 2016 and 2015,
respectively.
The District
has one significant customer, the Ridgeview Youth Services Center.
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 31% and 61% of the Company’s total water and
wastewater revenues for the three months ended November 30, 2016
and 2015, respectively.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Revenues
related to the provision of water for the oil and gas industry to
one customer accounted for 52% of the Company’s water and
wastewater revenues for the three months ended November 30, 2016,
respectively. The Company had no revenues related to the provision
of water for the oil and gas industry for the three months ended
November 30, 2015.
The
Company had accounts receivable from the District which accounted
for 50%
and 74% of the
Company’s wholesale water and wastewater trade receivables
balances at November 30, 2016 and August 31, 2016,
respectively.
Accounts
receivable from the District’s largest customer accounted for
42%
and 63% of the
Company’s water and wastewater trade receivables as of
November 30, 2016 and August 31, 2016, respectively.
NOTE 8 – ACCRUED LIABILITIES
At
November 30, 2016, the Company had accrued liabilities of $63,700,
of which $7,900 was for estimated property taxes, $24,500 was for
professional fees, and $31,400 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 was for professional fees and the
remaining $28,900 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.
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.
NOTE 11 – SUBSEQUENT EVENTS
The
Company entered into a contract with Nelson Pipeline to construct
the Sky Ranch water transmission line for approximately $4.5
million, to interconnect the Lowry Range water system to the
development at Sky Ranch. Construction began on the water
transimission line on December 12, 2016.
On
December 15, 2016 the District, acting by and through its Water
Activity Enterprise, entered into a Water Service Agreement with
Elbert & Highway 86 Commercial Metropolitan District, acting by
and through its Water Enterprise. Upon closing, the agreement will
result in the Company, in its capacity as the exclusive service
provider for Rangeview, acquiring the right to provide water
service to Wild Pointe Ranch located in unincorporated Elbert
County Colorado, in exchange for $1,600,000 cash. The closing of
the transactions contemplated by the Water Service Agreement is
expected to occur no later than February 23, 2017. For
additional information see the Company’s Current Report on
Form 8-K filed with the SEC on December 19, 2016.