NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2020
NOTE 1 – PRESENTATION OF INTERIM INFORMATION
The February 29, 2020 consolidated balance sheet, the consolidated statements of operations and comprehensive income for the three and six months ended February 29, 2020 and February 28, 2019,
the consolidated statements of shareholders’ equity for three the six months ended February 29, 2020 and February 28, 2019, and the consolidated statements of cash flows for the six months ended February 29, 2020 and February 28, 2019 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 February 29, 2020, 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, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2019. The results of operations for interim periods presented are not necessarily indicative of the operating results for
the full fiscal year. The August 31, 2019 balance sheet was derived from the Company’s audited consolidated financial statements.
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, depreciation and the recoverability of long lived 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 three months ended February 29, 2020, the Company’s main operating account exceeded federally insured limits. To date, the Company has
not 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 accumulates 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. 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.
Contract Asset
Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is
not required. Contract assets reflect revenue which has been earned but not yet invoiced. The contract assets are transferred to receivables when the Company has the right to bill such amounts and they
are invoiced.
Investments
Management determines the appropriate classification of its investments in U.S. Treasury debt securities at the time of purchase and re-evaluates such determinations each reporting period.
Securities that the Company does not have the positive intent or ability to hold to maturity, including certificate of deposits and U.S. Treasury debt securities, are reported at their fair value. Changes in value of 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. As of February 29, 2020, the Company's U.S. Treasury
debt securities had no maturity dates greater than three months and were classified as cash and cash equivalents in the balance sheet. As of February 29, 2020, the Company held seven certificate of deposits with original maturity dates greater
than three months and are classified as short-term investments in the balance sheet.
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. 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. 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 significant input to determine where within the fair value hierarchy the measurement falls. The estimated fair value measurements
in Note 2 – Fair Value Measurements are based on Level 2 of the fair value hierarchy.
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 are recorded at 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 at fair value 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 in Part II, Item 8 of the 2019 Annual Report). 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 in Part II, Item 8 of the 2019 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
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 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.
Revenue Recognition
The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income.
Wholesale Water and Wastewater Fees
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 related performance obligations
separately, as described below.
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 4.0 million and 13.8 million gallons of water to customers during the three months ended February 29, 2020 and February 28, 2019, respectively, of which
4% and 68% was used for oil and gas exploration. The Company delivered 20.0 million and 135.4 million gallons of water to customers during the six months ended February 29, 2020 and February 28, 2019, respectively, of which 5% and 79% was used for
oil and gas exploration.
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 construction fees, including fees received to construct “Special Facilities” (as defined below), 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 has been recognized during the three or six months ended February 29, 2020 or February 28, 2019.
The Company is reducing its consulting services in order to focus its resources on the water systems at Sky Ranch. The Company expects consulting fees to be minimal in future
periods.
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 home 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 that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a
finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot. During the three months ended February 29, 2020, the Company received payment and recognized revenue
of $1,406,100 from one home builder in exchange for the delivery of 20 finished lots. During the six months ended February 29, 2020, the Company received payment and recognized revenue of $2,836,700 from one home builder in exchange for the
delivery of 41 finished lots. During the three and six months ended February 28, 2019, the Company received $300,000 from one home builder in exchange for the delivery of 4 finished lots.
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 February 29, 2020, the Company had received cumulative payments of
approximately $21 million under development agreements relating to 293 lots from two home builders, of which approximately $18.0 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for
full completion of the 293 lots. During the three months ended February 29, 2020 and February 28, 2019, the Company recognized $859,600 and $1,646,400 of lot sales over time, respectively. For the six months ended February 29, 2020 and February 28,
2019, the Company recognized $7,970,600 and $3,027,600 of lot sales over time, respectively. The Company had deferred revenue related to lot sales of $3,169,500 as of February 29, 2020. 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 each 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 or less.
The Company and the CAB have agreed that no payment is required with respect to advances made by the Company or expenses incurred related to construction of public improvements
unless and until the CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred. Due to this contingency, the reimbursable costs for the
construction of public improvements, including reimbursable costs for construction support activities, are included in Inventories and subsequently expensed through Land
development construction costs until the point in time when the CAB reimburses the Company for such public improvements. The Company submits specific costs for reimbursement to the CAB. Based on the specific costs being reimbursed by the
CAB, the Company records those costs that have been previously expensed in cost of sales as other income and those costs that remain capitalized as inventory costs as a reduction of the related inventory costs held in Inventories. Any reimbursable costs repaid after all capitalized expenses and lot revenues have been fully recognized are recorded as other income.
All amounts owed under the 2018 FFAA (as defined in Note 6 – Related Party Transactions) 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 public 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. Due to this contingency, interest is accrued to Interest Income with a corresponding allowance until the point in time when bonds are issued. At that
point, the allowance will be reversed for the portion of the accrued interest repaid and the accrued interest will be recognized. To date, the Company has accrued $1,031,900 for accrued interest for advances made to the CAB.
On November 19, 2019, the CAB sold tax-exempt, fixed rate senior bonds in the aggregate principal amount of approximately $11,435,000 and tax-exempt, fixed-rate subordinate
bonds in the aggregate principal amount of approximately $1,765,000 (collectively, the “Bonds”). Upon the sale of the Bonds, approximately $10.5 million of the net proceeds from the Bonds were used to partially 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. The remainder of the bond proceeds were retained by the CAB in cash in order to pay expenses relating to the cost of issuing the
bonds and repay debt service through 2021, when the CAB expects to generate enough revenue through mill levies, to repay bond holders.
The Company applied approximately $4.2 million of the net proceeds to partially reduce the remaining capitalized expenses in Inventories and
the excess of the capitalized public improvement expenses of approximately $6.3 million was recognized as Income from reimbursement of construction costs (related party) in other income. As a result of the
reimbursed costs, the margin from land development revenues is expected to increase to approximately 27%.
The Company records all reimbursable costs to Inventories and subsequently expenses these costs through Land development construction costs. All unpaid reimbursable costs, that the Company believes are recoverable from the CAB are accrued to a Note Receivable from the CAB pursuant to the 2018 FFAA. Each period, the Company performs
an impairment analysis on the recoverability of the outstanding reimbursable costs. The following table summarizes all reimbursable costs incurred to date, payments made from the CAB and any outstanding reimbursable amounts.
The Company expects to incur approximately an additional $4.5 million of construction costs related to public improvements and expects to be reimbursed approximately an
additional $18.5 million.
The Company evaluated disaggregation of revenue and has determined that no additional disaggregation of revenue is necessary.
Contract asset by segment is as follows:
The Company did not have a contract asset at February 29, 2020, February 28, 2019 or August 31, 2019.
Changes in contract asset were as follows:
Deferred revenue by segment is as follows:
The current portion of deferred revenue for oil and gas leases and water sales payment as of February 29, 2020 and August 31, 2019, is $2,283,763 and $706,464, respectively. There were no water
segment deferred revenues as of February 28, 2019 and August 31, 2019.
Changes in deferred revenue were as follows:
The recognition of unearned revenue was $10,807,353 and $5,920,319 from land development activities and $3,295,738 and $3,567,493 from oil and gas leases and water sales payments for the six
months ended February 29, 2020 and August 31, 2019, respectively.
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 February 29, 2020, the Company had outstanding open contracts for $13,698,400, which primarily related to the sale of 506 lots at Sky Ranch. The Company expects to
recognize approximately 89% 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 records 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 records future reimbursements as a reduction of reimbursable 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 net realizable value, the Company primarily relies
upon the most recent negotiated price. 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
As described in Note 2 – Summary of Significant Accounting Policies in Part II, Item 8 of the 2019 Annual Report, the Company entered into a Paid-Up Oil
and Gas Lease (the “Sky Ranch O&G Lease”) and a Surface Use and Damage Agreement that were subsequently purchased by a wholly owned subsidiary of ConocoPhillips Company and recently acquired by Crestone Peak Resources. Six wells have been
drilled within the Company’s mineral interest and placed into service (four new wells beginning in fiscal 2020) and are producing oil and gas and accruing royalties to the Company. During the three months ended February 29, 2020 and February 28,
2019, the Company received $269,500 and $44,400 net of taxes, respectively, in royalties attributable to these wells. During the six months ended February 29, 2020 and February 28, 2019, the Company received $538,600 and $75,800 net of taxes,
respectively, in royalties attributable to these wells. The Company classifies income from oil and gas lease and royalty payments as Other income in the statement of operations and comprehensive income as
the Company does not consider these arrangements to be a primary operating business activity.
Deferred Revenue
In July 2019, the Company received an up-front payment of $573,700 from an Agreement on Locations of Oil and Gas Operations for a pad site covering approximately 16 acres with the operator of the
Sky Ranch O&G Lease (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 three and six months ended February 29, 2020, the Company recognized $47,800 and $95,600 of income, respectively, related to the up-front payments received pursuant to the OGOA. No revenue was recognized for the three or six
months ended February 28, 2019 related to the up-front payments received pursuant to the OGOA. As of February 29, 2020 and August 31, 2019, the Company had deferred revenue of $451,900 and $547,500, respectively, related to the OGOA.
In September 2017, the Company entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”). Pursuant to the Bison Lease, the Company received an up-front payment of
$167,200 in October 2017, which will be recognized as income on a straight-line basis over the three year term of the lease. The Company recognized lease income of $13,900 during the three months ended February 29, 2020 and February 28, 2019
related to the up-front payment received pursuant to the Bison Lease. The Company recognized lease income of $27,900 during the six months ended February 29, 2020 and February 28, 2019 related to the up-front payment received pursuant to the Bison
Lease. As of February 29, 2020 and August 31, 2019, the Company had deferred revenue of $32,500 and $60,400, respectively, related to the Bison Lease that will be recognized as income ratably through September 2020.
The Company also billed and received payments of $2.0 million as of the quarter ended February 29, 2020 from one of its industrial water customer, to reserve first priority water for its oil and
gas fracking needs for defined periods through 2020. As the Customer uses the forecasted volumes each month, the Company will recognize revenue based on the volumes used. The Customer may take such volumes up to one year from invoice date. If the
Customer does not take the forecasted volumes in the anticipated period, such volumes are forfeited by the Customer. At that time, any payments received for unused volumes will be recognized as revenue. As of February 29, 2020, the Company had
deferred revenue of $2.0 million as a result of these advanced water purchase payments.
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.
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 any 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. The impact on the income tax provision for the granting and exercise of stock options during the three
and six months ended February 29, 2020 was a deferred tax expense of approximately $5,600 and a deferred tax benefit of $20,300, respectively. Because the Company had a full valuation allowance on its deferred tax assets as of November 30, 2018,
there was no effect on the tax provision during the period. The Company recognized $247,800 of share-based compensation expense, which included unrestricted stock grants, and $58,200 of share-based compensation expense during the three months ended
February 29, 2020 and February 28, 2019, respectively. The Company recognized $353,200 of share-based compensation expense, which included unrestricted stock grants, and $161,700 of share-based compensation expense during the six months ended
February 29, 2020 and February 28, 2019, 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 February 29, 2020.
As a result of H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017, the Company has a $282,000 alternative minimum tax (“AMT”) deferred tax
asset for which it did not have a valuation allowance as of February 29, 2020 and August 31, 2019. 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 ending 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’s effective tax rate was 22.3% and 24.6% for the three and six months ended February 29, 2020, respectively. The effective tax rate was 0% for the three and six months ended February
28, 2019 due to the valuation allowance the Company maintained on its net deferred tax asset.
The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, as well as operating loss and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The Company maintained a valuation allowance on the net deferred tax asset other than AMT credits as of February 28, 2019, as the Company had determined it was more likely than not that the
Company would not realize its deferred tax assets as of February 28, 2019. Such assets primarily consisted 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 was no longer necessary as of August 31, 2019 and released the valuation allowance.
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 2015 through fiscal year 2019.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At February 29, 2020, the Company did not have any
accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the six months ended February 29, 2020 or February 28, 2019.
Income per Common Share
Income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Common stock options of 263,273 and 195,196 common share
equivalents as of the three months ended February 29, 2020 and February 28, 2019, respectively, were included in the calculation of income per common share as dilutive common stock equivalents using the treasury stock method. Common stock options
of 243,685 and 209,579 common share equivalents as of the six months ended February 29, 2020 and February 28, 2019, 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 the six months ended February 28, 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 the standard effective September 1, 2019, and recorded a right-of-use
asset of approximately $258,900 and a lease obligation liability of approximately $252,300.
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, 2022, including interim periods within those fiscal years. The Company is currently assessing
the provisions of the standard and the impact of the adoption on its consolidated financial statements.
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 has assessed the impact of this standard on its condensed consolidated financial statements and determined that it is immaterial.
In June 2018, 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 ASC 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 has assessed the impact of this standard on its
consolidated financial statements and determined that is immaterial.
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 significant input to determine where within the fair value
hierarchy the measurement falls.
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had no Level 1 assets or liabilities as of February 29, 2020 or
August 31, 2019.
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 seven and one Level 2 assets as of February 29, 2020 and August 31, 2019, respectively, which consisted of short-term certificates of deposit.
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 February 29, 2020 and August 31, 2019. The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 4 – Long-Term Obligations and Operating
Lease).
The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.
Level 2 Asset – Investments. The Company’s investments are the Company’s only financial assets
measured at fair value on a recurring basis. The fair value of investment securities is based on the values reported by the financial institutions where the funds are held. Investment securities include certificates of deposit and U.S. Treasury
debt securities.
The Company’s non-financial assets measured at fair value on a non-recurring basis when assessing recoverability consist entirely of its investments in water and water systems 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 February 29, 2020:
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2019:
The Company also held 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 February 29, 2020, the
carrying amount of held-to-maturity securities was $0. As of August 31, 2019, the carrying amount of held-to-maturity securities was $192,800 and is recorded as short-term investments in the accompanying consolidated financial statements.
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 2019 Annual Report. There have been no significant changes to the Company’s water rights or water and wastewater service agreements during the six months ended February 29, 2020.
Investment in Water and Water Systems
The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at February 29, 2020 and August 31, 2019:
Capitalized terms in this section not defined herein are defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual Report.
The Rangeview water system includes the Sky Ranch water reclamation facility. The Company placed the facility in service during February 2020.
Construction in progress primarily consists of additional water facilities at Sky Ranch. The Company anticipates the additional facilities will be placed in service during the fourth quarter of fiscal 2020.
Depletion and Depreciation
The Company recorded depletion charges of $0 and $200 during the three months ended February 29, 2020 and February 28, 2019, respectively, and $300 and $800 during the six months ended February
29, 2020 and February 28, 2019, respectively . The depletion was related entirely to the Rangeview Water Supply.
The Company recorded $478,300 and $251,300 of depreciation expense during the three months ended February 29, 2020 and February 28, 2019, respectively. These figures include $95,600 and $90,400
of depreciation expense for other equipment not included in the table above in the three months ended February 29, 2020 and February 28, 2019, respectively.
The Company recorded $782,100 and $490,000 of depreciation expense during the six months ended February 29, 2020 and February 28, 2019, respectively. These figures include $180,400 and $178,400
of depreciation expense for other equipment not included in the table above in the six months ended February 29, 2020 and February 28, 2019, respectively.
NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE
The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular format
but is described below.
Participating Interests in Export Water Supply
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was 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 in Part II, Item 8 of the 2019 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 of the Company are also not entitled to payment of any dividend and have no contractual recourse against the Company.
As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal
portion (the Participating Interests in Export Water 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, including the Land Board’s CAA interest which was assigned and
relinquished to the Company in 2014. The Company did not make any CAA acquisitions during the three and six months ended February 29, 2020 and February 28, 2019.
The Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. As a result of the acquisitions and consideration
from cumulative sales of Export Water as detailed in the table below, the remaining potential third-party obligation at February 29, 2020, is approximately $1 million.
The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority. This means that the first payees receive their full payment before the
next priority level receives any payment and so on until full repayment. Of the next approximately $6.4 million of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive approximately
$5.6 million of revenue. Thereafter, the Company will be entitled to all but approximately $220,000 of the proceeds from the sale of Export Water after deduction of the Land Board royalty.
WISE Partnership
The Company, through the Rangeview District, entered into 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.
Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing 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. During the quarter ending February 29, 2020, the Company through the Rangeview District purchased an additional 400 acre feet of WISE water for $582,200. 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 an additional approximately $4.6
million over the next five years. See further discussion in Note 6 – Related Party Transactions.
Lease Commitments
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Effective as of 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 equal to a 12.5%
increase over the primary base payments. The change in the lease costs from adopting ASC 842 was not material to the Company’s operations.
The Company did not enter into any new leases in the three or six months ended February 29, 2020. Rent expense consisted of operating lease expense of $21,300 and $42,600 for the three and six months ended
February 29, 2020, respectively. There was no sublease rental income for the three or six months ended February 29, 2020. We paid $19,800 and $39,700 against Lease obligations —
operating leases in the three and six months ended February 29, 2020.
Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines the lease
and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.
The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for
purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of 6% on August 31, 2019, for all leases that commenced prior to that date. We also elected the
hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the lengthening of the lease term related to our lease.
ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the consolidated balance sheet as follows:
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 on 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 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 and stock awards under the 2014 Equity Plan in January 2015. Prior to the effective date of the 2014 Equity Plan, the Company granted options and stock awards to eligible participants under its 2004 Incentive Plan (the “2004
Incentive Plan”), which expired on 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 six months ended February 29, 2020:
On January 15, 2020, the six non-employee Board members were each granted 2,000 unrestricted stock grants. The fair market value of the unrestricted shares for share-based compensation expensing is equal to the
closing price of the Company's common stock on the date of grant of $12.45. Stock-based compensation expense includes $149,400 of expense related to unrestricted stock grants for the three and six months ended February 29, 2020. These stock grants
were fully expensed at the date of the grant because no vesting requirements exist for unrestricted stock grants. There was no stock-based compensation expense related to unrestricted stock grants for the three and six months ended February 28,
2019.
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 six months ended February 29, 2020:
All non-vested options are expected to vest.
Stock-based compensation expense, including unrestricted stock grant expense, was $247,800 and $58,200 for the three months ended February 29, 2020 and February 28, 2019, respectively.
Stock-based compensation expense, including unrestricted stock grant expense, was $353,200 and $161,700 for the six months ended February 29, 2020 and February 28, 2019, respectively.
At February 29, 2020, the Company had unrecognized compensation expenses totaling $624,900 relating to non-vested options that are expected to vest. The weighted-average period over which these
options are expected to vest is approximately two years.
NOTE 6 – RELATED PARTY TRANSACTIONS
The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other
approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of 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 (collectively, the “Sky Ranch Districts”) and the CAB are
quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of each of the Rangeview District, the Sky Ranch
Districts and the CAB consist of three employees of the Company and one independent board member.
The Rangeview District
On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with
the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”). The Company provides funding pursuant to the Participation Agreement annually with $17,400 and $22,200 being provided during fiscal years 2020 and 2019, respectively.
Through the WISE Financing Agreement, the Company agreed to fund the Rangeview District’s cost of participating in the regional water supply project known as the WISE partnership. During the
quarter ending February 29, 2020, the Company, through the Rangeview District, purchased an additional 400 acre feet of WISE water for $582,200. The Company anticipates spending an additional approximately $4.6 million over the next five fiscal
years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE. To date, the Company has
capitalized the funding provided pursuant to the WISE Financing Agreement because the funding has been provided to purchase capacity in the WISE infrastructure. The Company’s total investment in the WISE assets as of February 29, 2020, is
approximately $6.2 million.
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%
(6.75% at February 29, 2020). The maturity date of the loan is December 31, 2020. In January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview
District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement remains in effect. $1,017,700 of
the balance in Notes receivable - related parties at February 29, 2020, includes borrowings by the Rangeview District of $587,900 and accrued interest of $429,800.
Sky Ranch Community Authority Board
Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District Nos. 1 and 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.
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 funding agreements between the Company and the CAB and the Company and Sky Ranch Metropolitan District No. 5 pursuant to which
All amounts owed under the 2018 FFAA 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 public
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. Due to this contingency, interest is accrued to Interest Income with a corresponding allowance until the point in time when bonds are issued. At that point, the allowance will be reversed for the portion of the accrued interest repaid and the accrued
interest will be recognized. 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.
As of February 29, 2020, the balance of the Company’s advances, net of reimbursed costs in February 2020, to the CAB totaled $14.1 million, of which $1.8 million is included in Inventories and $12.3 million was expensed through Land development construction costs of revenues. The advances have been used by the CAB to pay for construction of
public improvements. The Company submits specific costs for reimbursement to the CAB. Based on the specific costs being reimbursed by the CAB, the Company records those costs that have been previously expensed in cost of sales as other income and
those costs that remain capitalized as inventory costs as a reduction of the related inventory costs held in Inventories. Any reimbursable costs repaid after all capitalized expenses and lot revenues have
been fully recognized are recorded as other income.
Refer to Note 1 – Presentation of Interim Information - Revenue Recognition - Land Development Activities for a summary of reimbursable costs incurred
to date, payments made from the CAB and any outstanding reimbursable amounts.
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. $27,800 of the
balance of the Notes receivable – related parties at February 29, 2020, includes borrowings by the CAB of $25,500 and accrued interest of $2,300.
NOTE 7 – SIGNIFICANT CUSTOMERS
Water and Wastewater
Pursuant to the Rangeview Water Agreements (defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual Report) and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and wastewater services on the Rangeview District’s behalf to the
Rangeview District’s customers. Sales to the Rangeview District accounted for 87% and 22% of the Company’s total water and wastewater revenues for the three months ended February 29, 2020 and February 28, 2019 respectively. Sales to the Rangeview
District accounted for 76% and 7% of the Company’s total water and wastewater revenues for the six months ended February 29, 2020 and February 28, 2019, respectively. The Rangeview District has three
significant customers, the Ridgeview Youth Services Center (“Ridgeview”), Sky Ranch Community Development (“Sky Ranch”) and Elbert & Highway 86 Commercial District (“Wild Pointe”). The Rangeview District’s significant customers accounted for
35%, 29% and 0%, respectively, of the Company’s total water and wastewater revenues for the three months ended February 29, 2020, and 16%, 0% and 0%, respectively, for the three months ended February 28, 2019. Ridgeview, Sky Ranch and Wild Pointe
accounted for 31%, 15% and 14%, respectively, and 5%, 0% and 0%, respectively, for the six months ended February 28, 2019.
Revenues related to the provision of water for the oil and gas industry to one customer accounted for approximately 23% of the Company’s water and wastewater revenues for the three months ended
February 29, 2020. Revenues related to the provision of water for the oil and gas industry to two customers represented approximately 52% and 21%, respectively, of the Company’s water and wastewater revenues for the three months ended February 28,
2019. Revenues related to the provision of water for the oil and gas industry to one customer represented approximately 23% of the Company’s water and wastewater revenues for the six months ended February 29, 2020. Revenues related to the provision
of water for the oil and gas industry to two customers represented approximately and 48% and 43%, respectively, for the six months ended February 29, 2020 and February 28, 2019 .
Land Development
Revenues from three customers represented 100% of the Company’s land development revenues for the three months ended February 29, 2020. The three customers represented 62%, 28% and 10%,
respectively, of the Company’s land development revenues for the three months ended February 29, 2020. Revenues from three customers represented 100% of the Company’s land development revenues for the three months ended February 28, 2019. The three
customers represented 58%, 27% and 15%, respectively, of the Company’s land development revenues for the three months ended February 28, 2019.
Revenues from three customers represented 100% of the Company’s land development revenues for the six months ended February 29, 2020 and February 28, 2019. The three customers represented 61%,
27% and 12%, respectively, of the Company’s land development revenues for the six months ended February 29, 2020 and 61%, 30% and 9%, respectively, of the Company’s land development revenues for the six months ended February 28, 2019.
Accounts Receivable
The Company had accounts receivable from the Rangeview District which accounted for 76% and 40% of the Company’s trade receivables balances at February 29, 2020 and August 31, 2019, respectively.
The Company had accounts receivable from one other customer which accounted for approximately 14% and 57% of its trade receivable balances at February 29, 2020 and August 31, 2019, respectively. Accounts receivable from Ridgeview accounted for 5%
and 5% of the Company’s water and wastewater trade receivables as of February 29, 2020 and August 31, 2019, respectively. Accounts receivable from Wild Pointe accounted for 41% and 0% of the Company’s water and wastewater trade receivables as of
February 29, 2020 and August 31, 2019, respectively.
NOTE 8 – ACCRUED LIABILITIES
At February 29, 2020, the Company had accrued liabilities of $3,840,700, of which $66,400 was for current operating lease obligations, $57,900 was for estimated property taxes, $54,900 was for
professional fees, and $3,661,500 was for operating payables, of which $3,108,400 is payable to the Rangeview Metropolitan District for water infrastructure capital projects and $188,200 is payable to the CAB for the development of Sky Ranch. The
Sky Ranch development costs are also included in Inventories or expensed through Land development construction costs.
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 and $930,900 is payable to the Rangeview District for water infrastructure capital projects. The Sky Ranch development costs were also included in Inventories or expensed through Land development construction costs.
NOTE 9 – 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
material 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 was not involved in litigation or other legal proceedings and had no contingencies where the risk of material loss was reasonably possible as of February 29, 2020, or August 31, 2019.
NOTE 10 – SEGMENT INFORMATION
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 (the “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 in Part II, Item 8 of the 2019 Annual Report). The Company 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:
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 of water rights and
water and wastewater systems in the Company’s wholesale water and wastewater services segment. The assets consist of land, inventories and deposits in the Company’s land development segment. The Company’s other assets primarily consist of cash and
cash equivalents, equipment, mineral rights, related party notes receivables and a deferred tax asset.
NOTE 11 – INCOME TAXES
The Company recorded income tax expense of $78,800 and $0 for the three months ended February 29, 2020 and February 28 2019, respectively, and $1,966,000 and $0 for the six months ended February
29, 2020 and February 28, 2019, respectively. The net expense during the three months ended February 29, 2020 consisted of current income tax expense of $75,700 and deferred income tax expense of $3,100. The net expense during the six months ended
February 29, 2020 consisted of current income tax expense of $1,244,000 and deferred income tax expense of $722,000. The deferred tax expense consists of the usage of the Company's remaining $2.5 million net operating loss carryforwards and payment
of deferred compensation in the period.
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items. At February 29, 2020 the Company is estimating an annual effective tax rate
of approximately 25%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to
various factors.
The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. The Company’s
effective income tax rate was 22.3% and 24.6% for the three and six months ended February 29, 2020, respectively. The Company did not record income tax expense for the three or six months ended February 28, 2019.
The Company paid Federal and State tax installments of $877,400 and $193,500, respectively, during the three and six months ended February 29, 2020. No taxes were paid during the three and six months ended February
28,2019.
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 February 29, 2020 and August 31, 2019 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 of 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.
At August 31, 2019, the Company had $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. As of November 30, 2019, the Company used the remaining balance of its net operating loss carryforwards.
NOTE 12 – SUBSEQUENT EVENT
On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus as a “pandemic”. First identified in late 2019 and known now as COVID-19, the outbreak has
impacted thousands of individuals worldwide. In response, many countries have implemented measures to combat the outbreak, which have impacted global business operations. As of the date of issuance of the financial statements, the Company's
operations have not been significantly impacted; however, the Company continues to monitor the situation. No impairments were recorded as of February 29, 2020, as no triggering events or changes in circumstances had occurred. However, due to
significant uncertainty surrounding the situation, management's judgment regarding this could change in the future. In addition, while the Company's results of operations, cash flows and financial condition could be negatively impacted, the extent
of the impact cannot be reasonably estimated at this time.