NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2019 and 2018
NOTE 1 – ORGANIZATION
Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008. The Company operates in two business segments; (i) developing wholesale water and wastewater systems
in the water-short Denver metropolitan area, and (ii) developing a Master Planned Community on approximately 930 acres of land located along the Interstate 70 corridor (“I-70”), approximately four miles south of Denver International Airport (“DIA”),
which is planned to include a mix of 3,200 single-family and multifamily residential units and over 2 million square feet of commercial, retail, and industrial space. The Company has accumulated valuable water and land interests over the past 30
years and has developed an extensive network of wholesale water production, storage, treatment, and distribution systems, and wastewater collection and treatment systems which serve domestic, commercial and industrial customers in the Denver
metropolitan region. The Company's land assets are located in one of the most active development areas in the Denver metropolitan region along I-70.
As of August 31, 2019, the Company had approximately $15.2 million of working capital, which included approximately $9.7 million of cash and cash equivalents,
including investments with maturities less than 90 days.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for
certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives of assets. 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 and U.S. Treasury debt securities. At various times during the fiscal year ended August 31, 2019, the Company’s main operating account exceeded federally
insured limits. The Company has never suffered a loss due to such excess balance.
Land Development Inventories
Inventories primarily include land held for development and sale. Inventories are stated at cost. Capitalized lot development costs at Sky Ranch are costs incurred to construct lots at Sky Ranch that meet the Company’s
capitalization criteria for improvements to a lot and are capitalized as incurred. The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of lots at Sky Ranch. The
Company uses the specific identification method for the purpose of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sale. The Company records all land cost of sales over time based on inputs
of costs incurred to date to total estimated costs to complete.
In accordance with Accounting Standards Codification (“ASC”) Topic 360, Property, Plant and Equipment (“ASC 360”), the Company values land held for sale at the lower of the
carrying value or net realizable value. In determining net realizable value, the Company primarily relies upon the most recent negotiated price that is a Level 2 input (see Note 3 – Fair Value Measurements for
definitions of fair value inputs). If a negotiated price is not available, the Company will consider several factors, including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the
net realizable value is lower than the current carrying value, the land is written down to its estimated net realizable value.
Investments
Management determines the appropriate classification of its investments in certificates of deposit and treasury 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 $192,800 of investments classified
as held-to-maturity at August 31, 2019, which represent certificates of deposit that mature within 12 months and are, therefore, classified as short-term. Securities that the Company does not
have the positive intent or ability to hold to maturity, including debt securities, are classified as available for sale securities and reported at their fair value. 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 treasury securities are typically 30-day maturities.
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.
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 and the carrying value approximate fair value
due to the short-term nature of the receivables.
Investments – The carrying amounts of investments approximate fair value. Investments are described further in Note 3 – 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” (as defined in Note 4 – Water and Land Assets). The amount payable is a
fixed amount but is repayable only upon the sale of “Export Water” (as defined in Note 4 – Water and Land Assets). 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 readily determinable fair value. The CAA is described further in Note 5 – Participating Interests in Export Water.
Notes Receivable – Related Parties – The carrying amounts of the Notes receivable –
related parties (including with the Rangeview Metropolitan District (the “Rangeview District”) and the Sky Ranch Community Authority Board (the “CAB”)) approximate their fair value because the interest rates on the notes approximate market
rates.
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 5 – Participating Interests in Export Water.
Cash Flows
The Company did not have any debt during the fiscal years ended August 31, 2019 and 2018, and therefore did not pay any interest during the fiscal years ended August
31, 2019 and 2018.
The Company did not pay any income taxes during the fiscal year ended August 31, 2018.
Trade Accounts Receivable
The Company records accounts receivable net of allowances for uncollectible accounts. The Company has not recorded an allowance for uncollectible accounts in receivables from continuing operations for either of the
periods ended August 31, 2019 or 2018. The allowance for uncollectible accounts was determined based on a specific review of all past due accounts.
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. The Company determined that no indicators were
noted which would result in an impairment of the Company’s long-lived assets for the period ended August 31, 2019 and 2018.
Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, if applicable, 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 water 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.
Revenue Recognition
The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income.
The Company generates revenues through two lines of business. Revenues are derived through its wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of
which businesses are described below.
The Company generates revenues through its wholesale water and wastewater business predominantly from three sources: (i) monthly wholesale water usage fees and wastewater service fees, (ii) one-time water and
wastewater tap fees and construction fees/Special Facility funding, and (iii) consulting fees. Because these items are separately delivered and distinct, the Company accounts for each of the items separately, as described below.
Wholesale Water and Wastewater Fees
In addition to providing domestic water, the Company provides raw water for hydraulic fracturing to industrial customers in the oil and gas industry that are located in and adjacent to its service
areas. Frack water revenues are recognized at a point in time upon delivering water to a customer.
The Company delivered 356.1 million and 406.6 million gallons of water to customers during the years ended August 31, 2019 and 2018, respectively, of which 84% and 77% was used for oil and gas exploration, respectively.
The Company recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges. The monthly wastewater treatment fees are shown net of amounts retained by the
Rangeview District. Costs of delivering water and providing wastewater service to customers are recognized as incurred.
The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service. The Company
recognized $3,018,300 and $49,900 of water tap fee revenues during the years ended August 31, 2019 and 2018, respectively. The water tap fees recognized are based on the amounts billed to the Rangeview District and any amounts paid to third parties
pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease. The Company recognized $526,400 of wastewater tap fees during the year ended August 31, 2019. No wastewater taps
were sold during the year ended August 31, 2018.
The Company recognizes construction fees, including fees received to construct “Special Facilities,” over time as the construction is completed because the customer is generally able to use the
property improvement to enhance the value of other assets during the construction period. Special Facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or
retail facility. Temporary infrastructure required prior to construction of permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are examples of Special Facilities. Management has determined
that Special Facilities are separate and distinct performance obligations because these projects are contracted to construct a specific water and wastewater system or transmission pipeline and typically do not include multiple performance obligations
in a contract with a customer. No Special Facilities revenue was recognized during the fiscal year ended August 31, 2019 or 2018.
As of August 31, 2019 and 2018, the Company had no contract liabilities related to water tap and construction fee/Special Facility funding revenue.
Land Development Activities
The Company generates revenues through the sale of finished lots at its Sky Ranch development primarily from several sources of revenues: (i) the sale of finished lots, (ii) construction support activities, (iii)
project management services, and (iv) reimbursable expenses incurred to develop certain public improvements.
The Company sells lots at Sky Ranch pursuant to distinct agreements with each builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the purchaser pays
for a ready-to-build finished lot and payment is a lump-sum payment upon completion of the finished lot. The Company will recognize revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder
and the builder is able to obtain a building permit, as the transaction cycle will be complete and the Company will have no further obligations for the lot. During the year ended August 31, 2019, the Company received payment and recognized revenue
of $4,053,800 from one home builder in exchange for the delivery of 57 finished lots. No revenue was recognized for lot sales at a point in time during the year ended August 31, 2018.
The Company’s second format is the sale of finished lots pursuant to a development agreement with builders, whereby the Company receives payments in stages that include (i) payment upon the delivery
of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and
control of the platted lots pass to the builders once the Company closes the sale of the platted lots. Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the
builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs. Any revenue in excess of amounts entitled to be billed is reflected on
the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue. As of August 31, 2019, the Company had received cumulative payments of approximately $14.0 million under the development
agreements relating to 198 lots from two home builders, of which approximately $10.0 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 198 lots. For the years
ended August 31, 2019 and 2018, the Company recognized approximately $7.9 million and approximately $2.1 million of lot sales over time, respectively. The Company had deferred revenues of $3,991,500 and $361,100 as of August 31, 2019 and 2018,
respectively. The Company does not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot. The Company adopted the practical expedient for financing components
and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year.
Pursuant to these agreements, the Company acts as the project manager and provides any and all services required to deliver the CAB-eligible improvements, including but not limited to CAB compliance;
planning design and approvals; project administration; contractor agreements; and construction management and administration. The Company must submit to the CAB a monthly invoice, in a form acceptable to the CAB. The Company is responsible for all
expenses it incurs in the performance of the agreements and is not entitled to any reimbursement or compensation except as defined in the agreements, unless otherwise approved in advance by the CAB in writing. The CAB is subject to annual budget and
appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation. The Company receives a project management fee of five percent (5%) of actual construction costs of CAB-eligible
improvements. The project management fee qualifies as a reimbursable cost to the Company. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft
costs, and land acquisition or any other costs that are not directly related to the cost of construction of CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly
related to the construction of CAB-eligible improvements are included in Inventories and accounted for in the same manner as construction support activities as described above. The Company and the CAB have
agreed that no payment is required by the CAB with respect to project management fees unless and until the CAB and/or the Sky Ranch Districts issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances
provided or expenses incurred for reimbursables. Due to this contingency, the project management fees are being accrued to revenue with a corresponding allowance until the point in time when bonds are issued by the Sky Ranch Districts and/or the CAB
and the CAB reimburses the Company for the public improvements. At that point, the portion of the project management fees repaid will be recorded as a note receivable and will be recognized as other income. To date, the Company has accrued $860,300 in project management services to the CAB.
The Company evaluated disaggregation of revenue and has determined that no additional disaggregation of revenue is necessary.
Deferred Revenue
Deferred revenues as of August 31, 2019, was comprised mainly of unearned revenue from lot sales, a Paid-Up Oil and Gas Lease between the Company and Bison Oil
and Gas, LLP for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Bison Lease”) and an Agreement on Locations of Oil and Gas Operations
Area covering approximately 16 acres entered into between the Company and the operator of the O&G Lease (defined under “Oil and Gas Lease Payments” below) in July 2019 (the “OGOA”).
Deferred revenues from lot sales for the years ended August 31, 2019 and 2018 were $4.0 million and $361,100, respectively.
The Company received an up-front payment of $167,200 in fiscal 2018, which is being recognized as income on a straight-line basis over three years (the term of the Bison Lease). The Company recognized lease income of
$55,700 and $51,100 during the fiscal years ended August 31, 2019 and 2018, respectively, related to the up-front payment received pursuant to the Bison Lease. As of August 31, 2019, the Company has deferred revenues of $60,400 related to the Bison
Lease that will be recognized into income ratably through September 2020.
The Company received an up-front payment of $573,700 in fiscal 2019 for the OGOA, which is being recognized as income on a straight-line basis over three years (the term of the agreement). If after three years the
operator has not spud at least one well on the oil and gas operations area, the operator may extend the right to the OGOA one additional year by paying $75,000 to the Company. The operator may only extend the OGOA for two additional years for a total
of five years. The Company recognized lease income of $26,200 during the fiscal year ended August 31, 2019 related to the up-front payment received pursuant to the OGOA. As of August 31, 2019, the Company has deferred revenues of $547,500 related to
the OGOA that will be recognized into income ratably through July 2022.
The Company received an up-front payment of $425,800 in fiscal 2019, which will be recognized as income as industrial water is provided to the operator beginning in October 2019. None of this up-front payment was
recognized in revenue as of August 31, 2019.
Deferred revenues by segment is as follows:
Changes in unearned revenue were as follows:
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be
invoiced and recognized as revenue in future periods. At August 31, 2019, the Company had outstanding open contracts for $22,189,000, which primarily related to the sale of 506 lots at Sky Ranch. The Company expects to recognize approximately 70% of
such revenue over the next 12 months.
Inventories
Inventories primarily include land held for development and sale, which the Company has begun developing and are stated at cost. Capitalized lot development costs at Sky Ranch are costs incurred to construct finished
lots at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot and are capitalized as incurred. The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to
the development of lots at Sky Ranch. The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sale. The Company will record all
land cost of sales when a lot is completed and sold on a lot-by-lot basis. Costs included in Inventories include common area costs that the Company funded through the CAB. The Company expects that such costs
will be reimbursable by the CAB. The Company will record any reimbursements as a reduction of any capitalized costs remaining in Inventories once the CAB has the ability to reimburse the costs (i.e., once
the Sky Ranch Districts and/or the CAB has issued bonds).
In accordance with ASC 360, the Company measures land held for sale at the lower of the carrying value or net realizable value. In determining fair value, the Company primarily relies upon the most recent negotiated
price that is a Level 2 input (see Note 3 – Fair Value Measurements for definitions of fair value inputs). If a negotiated price is not available, the Company will consider several factors, including, but not
limited to, current market conditions, recent comparable sales transactions and market analysis studies. If the net realizable value is lower than the current carrying value, the land is written down to its net realizable value.
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 invoiced directly by the Rangeview District, and a percentage of
such collections are then paid to the Company by the Rangeview District. Water revenue from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.
Oil and Gas Lease Payments
In July 2019, the Company received an up-front payment of $573,700 for the OGOA, which will be recognized as income on a straight-line basis over three years. If after three years the operator has not spud at least one
well on the OGOA, the operator may extend the right to the OGOA one additional year by paying $75,000 to the Company. The operator may only extend the OGOA for two additional years for a total of five years. The Company recognizes the up-front
payments on a straight-line basis over the terms of the respective agreements. During the fiscal years ended August 31, 2019 and 2018, the Company recognized $26,200 and $0, respectively, of income related to the up-front payments received pursuant to the OGOA.
The Company entered into the Bison Lease, on September 20, 2017. Pursuant to the Bison Lease, the Company received an up-front payment of $167,200, which is being recognized as income on a straight-line basis over
three years (the term of the Bison Lease). The Company recognized lease income of $55,700 and $51,100 during the fiscal years ended August 31, 2019 and 2018, respectively, related to the up-front payment received. As of August 31, 2019, the Company
has deferred revenues of $60,400 of income related to the Bison Lease that will be recognized into income ratably through September 2020.
As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a three-year Paid-Up Oil and Gas Lease (the “O&G Lease”) and a
Surface Use and Damage Agreement with Anadarko E&P Company, L.P. (“Anadarko”), which subsequently sold the O&G Lease to a wholly-owned subsidiary of ConocoPhillips Company, 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. In 2014, the O&G Lease was extended for an additional two years. During 2015, two wells were placed into service and began producing oil and
gas and accruing royalties to the Company. The O&G Lease is now held by production. During the fiscal years ended August 31, 2019, and 2018, the Company received $148,300 and $191,300,
respectively, in royalties attributable to these two wells. The Company classifies income from lease and royalty payments as Other income in the consolidated statements of operations and comprehensive income
as the Company does not consider these arrangements to be an operating business activity.
Share-based Compensation
The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company recognizes share-based compensation costs as expenses 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. The Company has released its full valuation allowance on its deferred tax assets as of August 31, 2019. The impact on the income
tax provision for the granting and exercise of stock options during the fiscal year ended August 31, 2019, was a tax expense of approximately $82,900. Because the Company had a full
valuation allowance on its deferred tax assets as of August 31, 2018 there was approximately a $410,600 deferred tax impact on the income tax provision as a result of the granting and
exercise of stock options.
The Company recognized $336,200 and $324,800 of share-based compensation expenses during the fiscal years ended August 31,
2019 and 2018, 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
does not have any significant unrecognized tax benefits as of August 31, 2019.
The Company’s deferred tax asset and valuation allowance was decreased by approximately $1.2 million as a result of the decreased corporate tax rate that went into effect pursuant to H.R.1, commonly known as the Tax
Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017. As of August 31, 2018, the Company has a $282,000 alternative minimum tax (“AMT”) deferred tax asset for which it does not have a valuation allowance. The Company expects to
receive the AMT as a refund in future years. Most, if not all, of this credit will be refundable starting with the filing of the 2018 (fiscal year ended 2019) through 2021 (fiscal year ending 2022) tax returns, subject to limitations of Internal
Revenue Code Section 382 (arises with ownership changes) and the sequestration limitation of the Balanced Budget Act of 1997. The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during fiscal
2020.
The Company maintained a valuation allowance on the net deferred tax asset other than AMT credits as of August 31, 2018. The Company has determined it is more likely than not that the Company will
realize its deferred tax assets. Such assets primarily consist of operating loss carryforwards. The Company assessed the realizability of its deferred tax asset using all available evidence. In particular, the Company considered both historical
results and projections of profitability for the reasonably foreseeable future periods. The Company is required to reassess its conclusions regarding the realization of its deferred tax assets at each financial reporting date. As a result of the
evaluation, the Company concluded that all of the valuation allowance is no longer necessary. By releasing the valuation allowance, the Company recognized a deferred tax benefit of approximately $1,284,100 which positively impacted the Company’s
results of operations and financial position.
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 2015 through fiscal 2018. The Company does not believe that
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 August 31, 2019, the
Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the fiscal year ended August 31, 2019 or 2018.
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 of 206,860 and 169,770 common share equivalents as
of August 31, 2019 and 2018, respectively, were included in the calculation of income per common share as dilutive common stock equivalents using the treasury stock method. Common stock options
aggregating 50,000 common share equivalents as of August 31, 2019, have been excluded from the calculation of income per common share as their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company
undertakes a study to determine the consequence of the change to its consolidated financial statements and to 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 June 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This standard expands the scope of Accounting Standards Codification
Topic 718, Compensation — Stock Compensation, which currently only includes share-based payments issued to employees, to include share-based payments issued to nonemployees for goods and services.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes ASC Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within these fiscal years. The Company believes that the impact of this standard on its consolidated financial statements is
immaterial.
In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate
the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early adoption is permitted in any interim period after issuance of the standard. The Company believes that the impact of this standard on its consolidated financial statements is immaterial.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things,
these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use
forward-looking information to better inform their credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the
provisions of the standard and the impact of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 provides guidance on the recognition, measurement,
presentation, and disclosure of leases. The new standard supersedes the present GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations. This standard is effective
for fiscal years beginning after December 15, 2018. The Company adopted ASU 2016-02 on September 1, 2019. The Company anticipates that the adoption will result in right-to use assets and a corresponding liability of approximately of $750,000 on its
balance sheet.
NOTE 3 – 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 no Level 1 assets or liabilities as of August 31, 2019 or August 31, 2018.
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 one and seven Level 2 assets as of August 31, 2019 and 2018, respectively, which consist of certificates of deposit and/or 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 one Level 3 liability, the contingent
portion of the CAA, as of August 31, 2019 and 2018. The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export
Water).
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 – Investments. The Company’s investments are the
Company’s only financial asset measured at fair value on a recurring basis. The fair value of the investment 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. treasuries.
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2019:
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2018:
The Company also holds a certificate of deposit that is not carried at fair value on the consolidated balance sheets and is classified as a held-to-maturity security. As of August 31, 2019, the carrying amount of held-to-maturity securities was $192,800. As of August 31, 2018, the
carrying amount of held-to-maturity securities was $190,400.
NOTE 4 – WATER AND LAND ASSETS
Investment in Water and Water Systems
The Company’s water and water systems consist of the following approximate costs and accumulated depreciation and depletion as of August 31:
The Company is constructing a water reclamation facility for the Sky Ranch development. The costs of the facility are being recorded in construction in progress. The Company anticipates the facility will be completed
in the second quarter of fiscal 2020 at a total cost of approximately $12 million.
Depletion and Depreciation
The Company recorded $1,900 and $2,200 of depletion charges during the fiscal years ended August 31, 2019 and 2018, respectively. During the fiscal years ended August
31, 2019 and 2018, this related entirely to the Rangeview Water Supply (as defined below).
The Company recorded $1,278,900 and $900,500 of depreciation expense in the fiscal years ended August 31, 2019 and 2018, respectively. These figures include $312,600 and $251,200
of depreciation expense for other equipment not included in the table above in the fiscal years ended August 31, 2019 and 2018, respectively.
Rangeview Water Supply and Water System
The “Rangeview Water Supply” consists of approximately 26,985 acre feet and is a combination of tributary surface water and groundwater rights along with certain storage rights associated with the Lowry Range, a
27,000-acre property owned by the Land Board located 16 miles southeast of Denver, Colorado. Approximately $18.4 million of Investments in Water and Water Systems on the Company’s balance sheet as of August 31, 2019, represents the costs of assets acquired or facilities constructed to extend water service to customers located on and off the Lowry Range. The recorded costs of the Rangeview Water Supply include payments to the sellers
of the Rangeview Water Supply, design and construction costs and certain direct costs related to improvements to the asset, including legal and engineering fees.
The Company acquired the Rangeview Water Supply beginning in 1996 when:
In July 2014, the Company, the Rangeview District and the Land Board entered into the 2014 Amended and Restated Lease (the “Lease”), which superseded the original 1996 lease, and the Company and the Rangeview District
entered into an Amended and Restated Service Agreement. Collectively, the foregoing agreements, as amended, are referred to as the “Rangeview Water Agreements.”
Pursuant to the Rangeview Water Agreements, the Company owns 11,650 acre feet of water consisting of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water which can be exported off the
Lowry Range to serve area users (referred to as “Export Water”). The 1,650 acre feet of surface rights are subject to completion of documentation by the Land Board related to the Company’s exercise of its right to substitute an aggregate gross volume
of 165,000 acre feet of its groundwater for 1,650 acre feet per year of adjudicated surface water and to use this surface water as Export Water. Additionally, assuming completion of the substitution of groundwater for surface water, the Company has
the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Range and the right to develop an additional 13,685 acre feet of groundwater and 1,650 acre feet of adjudicated surface water to serve
customers either on or off the Lowry Range. The Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Range.
Services on the Lowry Range – Pursuant to the Rangeview Water Agreements, the Company designs, finances, constructs, operates and maintains the Rangeview
District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Range. The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns both
systems. After 2081, ownership of the water system will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater system.
Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements. Rates and charges are required to
be not greater than the average of similar rates and charges of three surrounding municipal water and wastewater service providers, which are reassessed annually. Pursuant to the Rangeview Water Agreements, the Land Board receives a royalty of 10% or
12% of gross revenues from the sale or disposition of the water, depending on the nature and location of the purchaser of the water, except that the royalty on tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt). The Company
also is required to pay the Land Board a minimum annual water production fee, which will offset future royalty obligations. The Company has made minimum annual royalty payments of $45,600. The Rangeview District retains 2% of the remaining gross
revenues, and the Company receives 98% of the remaining gross revenues after the Land Board royalty. The Land Board does not receive a royalty on wastewater fees. The Company receives 100% of the Rangeview District’s wastewater tap fees and 90% of
the Rangeview District’s wastewater usage fees (the Rangeview District retains the other 10%).
Export Water – The Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry Range,
including customers of the Rangeview District and other governmental entities and industrial and commercial customers. The Company will own all wholesale facilities required to extend water and wastewater services using its Export Water. The Company
anticipates contracting with third parties for the construction of these facilities. If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10% to 12% of gross revenues, except that the royalty on
tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt).
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. During fiscal 2019,
the Company made $419,200 in capital investments in WISE. During fiscal 2018, the Company did not make any capital investments in WISE. Capitalized terms used under this caption are defined in Note 7 – Long-Term
Obligations and Operating Lease.
The Arapahoe County Fairgrounds Water and Water System
The Company owns 321 acre feet of groundwater purchased pursuant to its agreement with Arapahoe County. The Company plans to use this water in conjunction with its Rangeview Water Supply in providing water to areas
outside the Lowry Range. The $2.9 million of capitalized costs noted in the table above includes the costs to construct various Wholesale and Special Facilities, including a new deep water well, a 500,000-gallon water tank and pipelines to transport
water to the Arapahoe County fairgrounds.
The Lost Creek Water Supply
In August 2019, the Company purchased 150 acre feet of ditch water rights, 800 acre feet of renewable groundwater rights, 70 acre feet of deep groundwater rights and 260 acres of land in Weld County.
Total consideration for the land and water included the $3.5 million purchase price, plus direct costs and fees of $42,200. The Company allocated the total acquisition cost to the land and water rights based on
estimates of each asset’s respective fair value. The purchase of the Lost Creek land and water was accounted for as an asset acquisition.
Service to Customers Not on the Lowry Range
Sky Ranch – In 2010, the Company purchased approximately 930 acres of undeveloped land known as Sky Ranch. The property includes the rights to approximately
830 acre feet of water. The Company plans to use this water in conjunction with its Rangeview Water Supply to provide water service to the Rangeview District’s customers at Sky Ranch. The $11.9 million of capitalized costs includes the costs to
acquire the water rights and to construct various facilities.
Total consideration for the land and water included the $7.0 million purchase price, plus direct costs and fees of $554,100. The Company allocated the total acquisition cost to the land and water rights based on
estimates of each asset’s respective fair value.
In June 2017, the Company completed and placed into service its Sky Ranch pipeline, connecting its Sky Ranch water system to the Rangeview District’s water system for approximately $5.7 million.
Wild Pointe – On December 15, 2016, the Rangeview District, acting by and through its water activity enterprise, and Elbert & Highway 86 Commercial
Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its water enterprise (the “Elbert 86 District”), entered into a Water Service Agreement (the “Wild Pointe Service
Agreement”). Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of the Company’s engagement by the Rangeview District as the Rangeview District’s exclusive service provider, the Company acquired, among other
things, the exclusive right to provide water services to residential and commercial customers in the Wild Pointe development, located in unincorporated Elbert County, Colorado, in exchange for $1,600,000 in cash. Pursuant to the terms of the Wild
Pointe Service Agreement, the Company, in its capacity as the Rangeview District’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the Elbert 86 District and for
operating and maintaining the Elbert 86 District’s water system. In exchange, the Company receives 100% of system development (or tap) fees from new customers and 98% of all other fees and charges, including monthly water service revenues, remitted
to the Rangeview District by the Elbert 86 District pursuant to the Wild Pointe Service Agreement. The Elbert 86 District’s water system currently provides water service to approximately 200 existing SFE water connections in Wild Pointe.
O&G Leases
In 2011, the Company entered into the O&G Lease with Anadarko. Pursuant to the O&G Lease, the Company received an up-front payment from Anadarko for the purpose of exploring for, developing, producing and marketing
oil and gas on 634 acres of mineral estate owned by the Company at its Sky Ranch property. The O&G Lease is now held by production, entitling the Company to royalties based on production.
In September 2017, the Company entered into the three-year Bison Lease for the purpose of exploring for, developing, producing and marketing oil and gas on 40 acres of mineral estate owned by the Company adjacent to
the Lowry Range.
Land and Mineral Interests
As part of the 2010 Sky Ranch acquisition, the Company acquired approximately 930 acres of land that is valued at approximately $3.1 million as of August 31, 2019. Additionally, the Company holds approximately 13,900 acres of mineral interests in Southeast Colorado in Otero, Bent and Prowers Counties
and has valued these mineral interests at approximately $1,425,500.
As of August 31, the approximate costs allocated to the Company’s land and mineral interest are as follows:
NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was finalized 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 that 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). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million
investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water,
the amounts and timing of which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, if the Company does not sell the Export Water, the holders of
the Series B Preferred Stock are 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 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
fiscal year ended August 31, 2019 or 2018.
The Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. Additionally, as a result of the
acquisitions, and the consideration from the cumulative sales of Export Water, as detailed in the table below, the remaining potential third-party obligation at August 31, 2019, is approximately $1 million:
The CAA includes contractually established priorities which 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. Of the next approximately $6.5 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.7 million of revenue.
NOTE 6 – ACCRUED LIABILITIES
At August 31, 2019, the Company had accrued liabilities of $3,428,400, of which $460,500 was for accrued compensation, $94,000 was for estimated property
taxes, $70,000 was for professional fees and the remaining $2,803,900 was related to operating payables, of which $1,399,600 is payable to the CAB for the development of Sky Ranch. These costs are included in Inventories
and subsequently expensed through Land development construction costs. In addition, $930,900 of the operating payables is payable to the Rangeview District for construction costs related to the wastewater
facility. These costs are also included in Investments in water and water systems.
At August 31, 2018, the Company had accrued liabilities of $849,500, of which $400,000 was for accrued compensation, $29,000 was for estimated property taxes,
$59,000 was for professional fees and the remaining $361,500 was related to operating payables.
NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE
As of August 31, 2019 and 2018, the Company had no debt.
The Participating Interests in Export Water Supply are obligations of the Company that have no scheduled maturity dates. Therefore, these liabilities are not disclosed in tabular format. However, the Participating
Interests in Export Water Supply are described in Note 5 – Participating Interests in Export Water.
WISE Partnership
During December 2014, the Company, through the Rangeview 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 Rangeview 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. During
fiscal 2019, the Company did not make any capital investments in WISE.
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 and Service Agreement (the “WISE Financing
Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014. The Company’s cost of funding the Rangeview 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 $7.0 million over the next five years. See further discussion in Note 14 – Related Party Transactions.
Operating Lease
Effective February 2018, the Company entered into an operating lease for approximately 11,393 square feet of office and warehouse space. The lease has a three-year term with payments of $6,600 per month and an option
to extend the primary lease term for a two-year period at a rate representing a 12.5% increase over the primary base payments. The change in the lease costs is not material to the Company’s operations.
NOTE 8 – SHAREHOLDERS’ EQUITY
Preferred Stock
The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the
Company for $1.00 per share less any dividends previously paid. In the event that the Company’s proceeds from the sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Stockholders will receive the next $432,513 of
proceeds in the form of a dividend. The terms of the Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid.
Equity Compensation Plan
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 Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. Awards to purchase 402,000
shares of the Company’s common stock have been made under the 2014 Equity Plan. 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 Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model (“Black-Scholes model”). Using the Black-Scholes model, the value of the portion of
the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income (loss). Option forfeitures are to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company does not expect any forfeiture of its option grants and therefore the compensation expense has not been reduced for estimated
forfeitures. During fiscal year 2019, no options expired. During fiscal year 2018, 2,500 options expired. The Company attributes the value of share-based compensation to expense using the
straight-line single option method for all options granted.
The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:
In fiscal 2019, the Company granted its President and non-employee directors options to purchase 50,000 and a combined 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively. All of
the options expire 10 years after the date of grant. The Company calculated the fair value of the options granted during 2019 using the Black-Scholes model.
In fiscal 2018, the Company granted its President and non-employee directors options to purchase 50,000 and a combined 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively. All of
the options expire 10 years after the date of grant. The Company calculated the fair value of the options granted during 2018 using the Black-Scholes model.
The variable assumptions used in the fair value calculations using the Black-Scholes model are as follows:
During the fiscal years ended August 31, 2019 and 2018, 62,500 and 10,000 options were exercised, respectively.
The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the fiscal year ended August 31, 2019:
The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended August 31, 2019:
All non-vested options are expected to vest. The total fair value of options vested during the fiscal years ended August 31, 2019 and 2018, was $297,100 and
$210,700, respectively. The weighted average grant date fair value of options granted during the fiscal years ended August 31, 2019 and 2018 was $4.60 and $4.41, respectively.
Share-based compensation expense for the fiscal years ended August 31, 2019 and 2018, was $336,200 and $324,840, respectively.
At August 31, 2019, the Company had unrecognized expenses totaling $284,000 relating to non-vested
options that are expected to vest. The weighted average period over which these options are expected to vest is less than three years. The Company has not recorded any excess tax benefits to additional paid-in capital.
Warrants
As of August 31, 2019, the Company had outstanding warrants to purchase 92 shares of common stock at an exercise price of $1.80 per share. These warrants
expire six months from the earlier of:
No warrants were exercised during fiscal 2019 and 2018.
NOTE 9 – SIGNIFICANT CUSTOMERS
Water and Wastewater
Pursuant to the Rangeview Water Agreements and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and wastewater services on the Rangeview District’s
behalf to the Rangeview District’s customers. Sales to the Rangeview District accounted for 4% and 6% of the Company’s total water and wastewater revenues for the fiscal years ended August 31, 2019 and 2018, respectively. The Rangeview District had one significant customer, the Ridgeview Youth Services Center. The Rangeview District’s significant customer accounted for 3% and 4% of the Company’s
total water and wastewater revenues for the fiscal years ended August 31, 2019 and 2018, respectively.
Revenues from two customers represented approximately 72% and 16% of the Company’s water and wastewater revenues for the fiscal year ended August 31, 2019. Both customers are in the oil and gas industry. Revenues from
one customer represented approximately 68% of the Company’s water and wastewater revenues for the fiscal year ended August 31, 2018. This customer was in the oil and gas industry.
Land Development
Revenues from three customers represented 100% (34%, 34% and 32%) of the Company’s land development revenues for the fiscal year ended August 31, 2019. Revenues from two customers represented 98% of the Company’s land
development revenues for the fiscal year ended August 31, 2018. Of the two customers, one customer represented 66% and the second customer represented 32% of the Company’s land development revenues for the fiscal year ended August 31, 2018.
The Company had accounts receivable from the Rangeview District which accounted for 40% and 3% of the Company’s trade receivables balances at August 31, 2019 and
2018, respectively. The Company had accounts receivable from one other customer which accounted for approximately 57% of its trade receivable balances at August 31, 2019. The Company had accounts receivable from two other customers which accounted
for approximately 43% and 30% of its trade receivable balances at August 31, 2018, respectively. Accounts receivable from the Rangeview District’s largest customer accounted for 5% and 2% of the Company’s water and wastewater trade receivables as
of August 31, 2019 and 2018, respectively.
NOTE 10 – INCOME TAXES
Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company’s deferred tax assets as of August 31 are as follows:
The Company maintained a valuation allowance on the net deferred tax asset other than AMT credit carryforwards as of August 31, 2018. For the fiscal year ended August 31, 2019, the Company has
determined it is more likely than not that the Company will realize its deferred tax assets, which consist primarily net operating loss carryforwards. The Company assessed the realizability of its deferred tax assets using all available evidence;
considering both historical results and projections of profitability for the reasonably foreseeable future periods. As a result of the Company’s annual reassessment of its conclusions regarding the realization of its deferred tax assets at each
financial reporting date, the Company concluded that its deferred tax assets are realizable, and therefore, the valuation allowance is no longer necessary. By releasing the valuation allowance, the Company recognized a deferred tax benefit of
approximately $1,284,100 which positively impacted the Company's results of operations and financial position.
Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following for the fiscal years ended August 31:
At August 31, 2019, the Company has $2.5 million of net operating loss carryforwards available for income tax purposes. The net
operating loss carryforwards expire at various times beginning in 2036 and ending in 2038 for federal income tax purposes and expire at various times beginning in 2035 and ending in 2036 for state income tax purposes.
No net operating loss carryforwards expired during the fiscal year ended August 31, 2019 or 2018.
The Tax Act reduced the Company’s corporate federal tax rate from 34% to 21% effective January 1, 2018. As a result, the Company is required to re-measure its deferred tax assets and liabilities using the enacted rate
at which it expects them to be recovered or settled. The effect of this re-measurement is recorded to income tax expense (benefit) in the year the tax law is enacted. The Company’s deferred tax asset and full valuation allowance was decreased by
approximately $1.2 million as a result of the decreased corporate tax rate during the fiscal year ended August 31, 2018. In addition, the Company recorded a $282,000 AMT deferred tax asset for which it does not
have a valuation allowance. The Company expects to receive the AMT deferred tax asset as a refund in future years. Most, if not all, of this credit will be refundable starting with the filing of the 2018 (fiscal year ending 2019) through 2021 (fiscal
year ending 2022) tax returns, subject to limitations of the Internal Revenue Code. The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during 2019.
NOTE 11 – 401(K) PLAN
The Company maintains a Pure Cycle Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”), a defined contribution retirement plan for the benefit of its employees. The 401(k) Plan is currently a salary deferral
only plan, and at this time the Company does not match employee contributions. The Company pays the annual administrative fees of the 401(k) Plan, and the 401(k) Plan participants pay the investment fees. The 401(k) Plan is open to all employees, age
21 or older, who have been employees of the Company for at least six months. During the fiscal years ended August 31, 2019 and 2018, the Company paid fees of $6,000 and $5,900, respectively,
for the administration of the 401(k) Plan.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a loss contingency when its
occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and
experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. The Company had
no contingencies where the risk of material loss was reasonably possible as of August 31, 2019.
NOTE 13 – SEGMENT REPORTING
An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group,
to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer.
During the year 2018, the Company began construction of lots at Sky Ranch, which the Company has identified as a segment. Currently, the Company operates its wholesale water and wastewater services segment and land
development activities at Sky Ranch as its two lines of business.
The wholesale water and wastewater services business includes selling water service to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing
infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater.
As part of the Company’s land development activities at Sky Ranch, the Company entered into contracts for the sale of lots (see Note 2 – Summary of Significant Accounting Policies).
The Company has identified land development and lot sales as a separate segment beginning in the fiscal year 2018.
Oil and gas royalties and licenses are a passive activity and not an operating business activity and, therefore, are not classified as a segment.
The following table summarizes wholesale water and wastewater services and land development revenue information by segment (1):
(1) The Company had other income from non-segment sources (oil and gas, interest and other) of $529,293 and $441,407 for the fiscal years ended August 31, 2019 and 2018, respectively.
The following table summarizes wholesale water and wastewater services and land development pretax income by segment:
The following table summarizes total assets for the Company’s wholesale water and wastewater services business and land development business by segment. The assets consist primarily of water rights and water and
wastewater systems in the Company’s wholesale water and wastewater services segment and land, inventories and deposits in the Company’s land development segment. The Company’s other assets (“Corporate”) primarily consist of cash and cash
equivalents, equipment, mineral rights, related party notes receivables and a deferred tax asset.
For the years ended August 31, 2019 and 2018, the Company had asset additions of $14.1 million and $2.9 million, respectively, in the wholesale water and wastewater services segment.
For the years ended August 31, 2019 and 2018, the Company had asset additions of $18.6 million and $4.7 million, respectively, in the land development activities segment. The Company allocated $4.8 million from other
water and wastewater to its land development activities segment in fiscal 2018.
NOTE 14 – RELATED PARTY TRANSACTIONS
On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District
joining the South Metro Water Supply Authority (“SMWSA”). The Company provided funding of $22,200 and $198,200 for the fiscal years ended August 31,
2019 and
2018, respectively.
Through the WISE Financing Agreement, to date the Company has made payments totaling $3,533,300 to purchase certain rights to use existing water transmission and
related infrastructure acquired by the WISE project and to construct the connection to the WISE system. The amounts are included in Investments in water and water systems on the Company’s balance sheet as
of August 31, 2019. The Company anticipates spending the following over the next five fiscal years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for
WISE and to fund operations and water deliveries related to WISE:
Estimated WISE Costs
The Company has outstanding notes receivable of $988,400 in the aggregate from the Rangeview District and the CAB, which are related parties, as discussed below:
The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The
Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of the Rangeview District. The Company owns
certain rights and real property interests which encompass the current boundaries of the Rangeview District. Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (the “Sky Ranch Districts”) and the CAB are quasi-municipal corporations and political
subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the CAB consist of three employees of the
Company (including the Company’s President) and one independent board member.
The Rangeview District
In 1995, the Company extended a loan to the Rangeview District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (7.25% at August 31,
2019). The maturity date of the loan is December 31, 2020. Beginning in January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for
day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the Lease remains in effect. Of the August 31, 2019 balance in Notes receivable - related parties, $961,300 includes borrowings by the Rangeview District of $546,500 and accrued interest of $414,800. Of the August 31, 2018 balance in Notes receivable - related
parties, $880,700 includes borrowings by the Rangeview District of $484,000 and accrued interest of $396,700.
Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5
The Company had been providing funding to the Sky Ranch Districts, beginning in 2012 through 2016 by entering into annual Operation Funding Agreements with one of the Sky Ranch Districts obligating the Company to
advance funding to the Sky Ranch District for the operation and maintenance expenses for the then-current calendar year. The Sky Ranch District paid the outstanding note receivable to the Company in November 2017. As of August 31, 2018, there was no
outstanding balance under these agreements.
In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with a Sky Ranch District obligating the Company to either finance district improvements or
to construct improvements on behalf of the Sky Ranch District subject to reimbursement. Each advance or reimbursable expense accrued interest at a rate of 6% per annum. No payments were required by the Sky Ranch District unless and until the Sky
Ranch District issued bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred. The CAB agreed to repay the amounts owed by the Sky Ranch District under this agreement and the agreement was
terminated pursuant to the 2018 FFAA (defined and described below).
Sky Ranch Community Authority Board
Pursuant to a certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No. 1 and Sky Ranch Metropolitan District No.
5 formed the CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public
improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services
that benefit the property. In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement (“PF Agreement”) with the CAB for the Sky Ranch property. The PF Agreement required the Company
to fund an agreed upon list of public improvements for Sky Ranch with respect to earthwork, erosion control, streets, drainage and landscaping at an estimated cost of $13.2 million for calendar years 2018 and 2019. Each advance or reimbursable
expense accrues interest at a rate of 6% per annum.
On September 18, 2018, the parties entered into a series of agreements, including a Facilities Funding and Acquisition Agreement with an effective date of November 13, 2017 (the “2018 FFAA”), which supersedes and
consolidates the previous agreements pursuant to which
All amounts owed under the terminated agreements and all amounts advanced under the 2018 FFAA, collectively totaling $20 million, bear interest at a rate of 6% per annum. No payment is required of the CAB for advances
made to the CAB or expenses incurred related to construction of improvements unless and until the CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of advances or other expenses incurred.
The CAB agrees to exercise reasonable efforts to issue bonds to reimburse the Company subject to certain limitations. In addition, the CAB agrees to utilize any available moneys not otherwise pledged to payment of debt, used for operation and
maintenance expenses, or otherwise encumbered, to reimburse the Company. Any advances not paid or reimbursed by the CAB by December 31, 2058, shall be deemed forever discharged and satisfied in full.
In 2018, the Company advanced the CAB $2.3 million to begin construction of improvements on the Sky Ranch property. In 2019, the Company advanced the CAB $17.7 million for the Sky Ranch property. The advances have been
used by the CAB to pay for construction of public improvements and have been recorded as Inventories and subsequently expensed through Land development construction costs in the accompanying financial
statements. If the Sky Ranch Districts and/or the CAB issues bonds and the CAB reimburses the Company, the reimbursement will reduce any applicable capitalized costs remaining in Inventories.
In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the CAB obligating the Company to advance funding to the CAB for operation and maintenance expenses for
the 2018 and 2019 calendar years. All payments are subject to annual appropriations by the CAB in its absolute discretion. The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance. $27,100 of the balance
of the Notes receivable – related parties at August 31, 2019, includes borrowings by the CAB of $25,500 and accrued interest of $1,600. The $25,500 balance of the Notes
receivable – related parties at August 31, 2018, includes borrowings by the CAB of $25,500 and accrued interest of $0.
NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly Results of Operations
The following item had a significant impact on the Company’s net income (loss):
NOTE 16 – SUBSEQUENT EVENTS
On October 25, 2019, the CAB filed a preliminary offering memorandum for the offering and issuance of tax-exempt, fixed rate senior bonds in the aggregate principal amount of approximately $10,820,000 and tax-exempt,
fixed-rate subordinate bonds in the aggregate principal amount of approximately $1,765,000 (collectively, the “Bonds”). If the Bonds are sold successfully, approximately $10 million of the net proceeds from the Bonds are expected to be used to
reimburse the Company for advances it made to the CAB pursuant to the 2018 FFAA to fund the construction of public improvements to the Sky Ranch property.