Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: February 28,
2017
or
__
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to
__________
Commission file number 0-8814
PURE CYCLE CORPORATION
|
(Exact name of registrant as specified in its charter)
|
Colorado
|
|
84-0705083
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification Number)
|
|
|
|
34501 E. Quincy Avenue, Bldg. 34, Box 10, Watkins, CO
|
|
80137
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
|
|
(303) 292 – 3456
|
(Registrant’s telephone number, including area
code)
|
|
|
|
|
(Former name, former address and former fiscal year, if changed
since last report)
|
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes
[X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ]
|
Accelerated
filer [X]
|
Non-accelerated filer [ ] (Do not check if a
smaller reporting company)
|
Smaller
reporting company [ ]
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes
[ ] No [X]
Indicate the number of shares outstanding of each
of the issuer’s classes of common stock, as of April
7, 2017:
Common stock, 1/3 of
$.01 par value
|
23,754,098
|
(Class)
|
(Number of Shares)
|
PURE CYCLE CORPORATION
INDEX TO FEBRUARY 28, 2017 FORM 10-Q
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
PART I. FINANCIAL INFORMATION
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Item 1. Consolidated Financial Statements
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
February
28, 2017 (unaudited) and August 31, 2016
|
|
|
1
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations and Other Comprehensive
Income (Loss):
|
|
For
the three and six months ended February 28, 2017 and
|
|
|
|
February
29, 2016 (unaudited)
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
Consolidated Statement of Shareholders’ Equity:
|
|
|
|
|
For
the six months ended February 28, 2017 (unaudited)
|
|
|
3
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows:
|
|
|
|
|
|
For
the six months ended February 28, 2017 and February 29, 2016
(unaudited)
|
4
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
Item 2. Management’s Discussion and Analysis of Financial
Condition
|
|
|
and
Results of Operations
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
|
29
|
|
|
|
|
|
|
|
|
Item 4. Controls and Procedures
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
PART II. OTHER INFORMATION
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
Item 6. Exhibits
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
SIGNATURES
|
|
|
|
|
|
|
31
|
PART I
– FINANCIAL INFORMATION
Item
1. Consolidated
Financial Statements
PURE CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS:
|
|
|
Current
assets:
|
|
|
Cash and cash equivalents
|
$6,751,491
|
$4,697,288
|
Short-term investments
|
21,386,422
|
23,176,450
|
Trade accounts receivable
|
78,336
|
181,006
|
Prepaid expenses
|
485,746
|
350,819
|
Assets of discontinued operations
|
572,403
|
680,287
|
Total current assets
|
29,274,398
|
29,085,850
|
|
|
|
Long-term
investments
|
1,424,954
|
6,853,276
|
Investments
in water and water systems, net
|
33,742,522
|
28,321,926
|
Land
and mineral interests
|
5,461,600
|
5,345,800
|
Notes
receivable - related parties, including accrued
interest
|
866,453
|
800,369
|
Other
assets
|
441,509
|
472,393
|
Total assets
|
$71,211,436
|
$70,879,614
|
|
|
|
LIABILITIES:
|
|
|
Current
liabilities:
|
|
|
Accounts payable
|
$1,258,983
|
$160,390
|
Accrued liabilities
|
100,027
|
242,624
|
Deferred revenues
|
55,800
|
55,800
|
Deferred oil and gas lease payment
|
7,000
|
19,000
|
Liabilities of discontinued operations
|
7,690
|
4,394
|
Total current liabilities
|
1,429,500
|
482,208
|
|
|
|
Deferred
revenues, less current portion
|
1,027,589
|
1,055,491
|
Participating
Interests in Export Water Supply
|
342,058
|
343,966
|
Total liabilities
|
2,799,147
|
1,881,665
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
Preferred
stock:
|
|
|
Series B - par value $.001 per share, 25 million shares
authorized;
|
|
|
432,513 shares issued and outstanding
|
|
|
(liquidation preference of $432,513)
|
433
|
433
|
Common
stock:
|
|
|
Par value 1/3 of $.01 per share, 40 million shares
authorized;
|
|
|
23,754,098 and 23,754,098 shares outstanding,
respectively
|
79,185
|
79,185
|
Additional
paid-in capital
|
171,302,736
|
171,198,241
|
Accumulated
other comprehensive (loss) income
|
(31,770)
|
3,122
|
Accumulated
deficit
|
(102,938,295)
|
(102,283,032)
|
Total shareholders' equity
|
68,412,289
|
68,997,949
|
Total liabilities and shareholders’ equity
|
$71,211,436
|
$70,879,614
|
See
accompanying Notes to Consolidated Financial
Statements
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(unaudited)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Metered water usage
|
$190,665
|
$27,393
|
$331,766
|
$84,173
|
Wastewater treatment fees
|
11,225
|
10,700
|
23,549
|
21,003
|
Special facility funding recognized
|
10,377
|
10,377
|
20,754
|
20,754
|
Water tap fees recognized
|
3,573
|
3,573
|
7,147
|
7,147
|
Other
|
21,238
|
24,399
|
52,961
|
69,275
|
Total revenues
|
237,078
|
76,442
|
436,177
|
202,352
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Water service operations
|
(77,701)
|
(58,476)
|
(157,566)
|
(125,792)
|
Wastewater service operations
|
(7,393)
|
(6,195)
|
(14,969)
|
(13,269)
|
Depletion and depreciation
|
(67,575)
|
(41,575)
|
(109,380)
|
(83,230)
|
Other
|
(16,011)
|
(14,682)
|
(32,272)
|
(30,610)
|
Total cost of revenues
|
(168,680)
|
(120,928)
|
(314,187)
|
(252,901)
|
Gross
(loss) profit
|
68,398
|
(44,486)
|
121,990
|
(50,549)
|
|
|
|
|
|
General
and administrative expenses
|
(449,545)
|
(449,334)
|
(892,787)
|
(889,133)
|
Depreciation
|
(74,267)
|
(62,911)
|
(148,255)
|
(115,827)
|
Operating
loss
|
(455,414)
|
(556,731)
|
(919,052)
|
(1,055,509)
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
Oil and gas lease income, net
|
6,000
|
161,430
|
11,265
|
322,860
|
Oil and gas royalty income, net
|
71,275
|
72,456
|
139,403
|
194,602
|
Interest income
|
66,098
|
77,579
|
139,665
|
141,400
|
Other
|
(2,600)
|
3,208
|
(5,215)
|
(1,060)
|
Net loss from continuing operations
|
(314,641)
|
(242,058)
|
(633,934)
|
(397,707)
|
(Loss) income from discontinued operations, net of
taxes
|
(2,649)
|
(28,641)
|
(21,329)
|
29,467
|
Net loss
|
$(317,290)-
|
$(270,699)
|
$(655,263)-
|
$(368,240)
|
Unrealized holding gains
|
(12,682)
|
13,182
|
(34,892)
|
13,182
|
Total comprehensive loss
|
$(329,972)
|
$(257,517)
|
$(690,155)
|
$(355,058)
|
|
|
|
|
|
Basic and diluted net income (loss) per common share
–
|
|
|
|
|
Loss from continuing operations
|
$(0.01)
|
$(0.01)
|
$(0.03)
|
$(0.02)
|
(Loss) earnings from discontinued operations
|
*
|
*
|
*
|
*
|
Net loss
|
$(0.01)
|
$(0.01)
|
$(0.03)
|
$(0.02)
|
|
|
|
|
|
Weighted average common shares outstanding . – basic and
diluted
|
23,754,098
|
23,754,098
|
23,754,098
|
23,841,461
|
|
|
|
|
|
*
Amount is less than $(.01) per share
|
|
|
|
|
See
accompanying Notes to Consolidated Financial
Statements
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Six months ended February 28, 2017
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1, 2016 balance:
|
432,513
|
$433
|
23,754,098
|
$79,185
|
$171,198,241
|
$3,122
|
$(102,283,032)
|
$68,997,949
|
Share-based
compensation
|
–
|
–
|
–
|
–
|
104,495
|
–
|
–
|
104,495
|
Net
loss
|
–
|
–
|
–
|
–
|
–
|
–
|
(655,263)
|
(655,263)
|
Unrealized
holding loss on investments
|
–
|
–
|
–
|
–
|
–
|
(34,892)
|
–
|
(34,892)
|
February
28, 2017 balance:
|
432,513
|
$433
|
23,754,098
|
$79,185
|
$171,302,736
|
$(31,770)
|
$(102,938,295)
|
$68,412,289
|
See
accompanying Notes to Consolidated Financial
Statements
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net loss
|
$(655,263)
|
$(368,240)
|
Adjustments to reconcile net loss to net cash
|
|
|
used in operating activities:
|
|
|
Depreciation and depletion
|
257,639
|
199,057
|
Investment in Well Enhancement Recover Systems, LLC
|
4,267
|
5,334
|
Stock-based compensation expense
|
104,495
|
108,878
|
Interest income and other non-cash items
|
(34,997)
|
(10,677)
|
Interest added to receivable from related parties
|
(12,476)
|
(16,436)
|
Changes in operating assets and liabilities:
|
|
|
Trade accounts receivable
|
102,670
|
307,461
|
Sky Ranch receivable
|
-
|
(5,521)
|
Prepaid expenses
|
(134,927)
|
(130,702)
|
Notes receivable - related parties
|
(53,608)
|
(12,757)
|
Accounts payable and accrued liabilities
|
(185,377)
|
(491,750)
|
Income taxes
|
-
|
(292,729)
|
Deferred revenues
|
(27,902)
|
(27,901)
|
Deferred oil and gas lease payment
|
(12,000)
|
(322,860)
|
Net cash used in operating activities from continuing
operations
|
(647,479)
|
(1,058,843)
|
Net cash provided by operating activities from discontinued
operations
|
111,180
|
833,666
|
Net cash used in operating activities
|
(536,299)
|
(225,177)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Sale (purchase) of short-term investments
|
7,218,350
|
(19,998,992)
|
Purchase of long-term investments
|
-
|
(10,000,000)
|
Investments in water, water systems, and land
|
(4,596,397)
|
(270,105)
|
Purchase of property and equipment
|
(29,542)
|
(411,922)
|
Net cash provided by (used in) investing activities from continuing
operations
|
2,592,411
|
(30,681,019)
|
Net cash provided by investing activities from discontinued
operations
|
-
|
-
|
Net cash provided by (used in) investing activities
|
2,592,411
|
(30,681,019)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Payments to contingent liability holders
|
(1,909)
|
(1,453)
|
Net cash used in financing activities from continuing
operations
|
(1,909)
|
(1,453)
|
Net cash provided by financing activities from discontinued
operations
|
-
|
-
|
Net cash used in financing activities
|
(1,909)
|
(1,453)
|
Net
change in cash and cash equivalents
|
2,054,203
|
(30,907,649)
|
Cash
and cash equivalents – beginning of period
|
4,697,288
|
37,089,041
|
Cash
and cash equivalents – end of period
|
$6,751,491
|
$6,181,392
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLSOURES OF NON-CASH ACTIVITIES
|
|
|
Investments in water assets through accounts
payable
|
1,141,373
|
-
|
Retirement of collateral stock
|
$-
|
$1,407,000
|
See
accompanying Notes to Consolidated Financial
Statements
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
NOTE 1 – PRESENTATION OF INTERIM
INFORMATION
The February 28, 2017 consolidated balance sheet, the consolidated
statements of operations and other comprehensive income (loss) for
the three and six months ended February 28, 2017 and February 29,
2016, the consolidated statement of shareholders’ equity for
the six months ended February 28, 2017, and the consolidated
statements of cash flows for the six months ended February 28, 2017
and February 29, 2016 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 28, 2017, and for
all periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted. It is
suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the
fiscal year ended August 31, 2016 (the “2016 Annual
Report”) filed with the Securities and Exchange Commission
(the “SEC”) on October 28, 2016. The results of
operations for interim periods presented are not necessarily
indicative of the operating results for the full fiscal year. The
August 31, 2016 balance sheet was derived from the Company’s
audited financial statements.
Use of Estimates
The preparation of consolidated financial statements in accordance
with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid instruments
with original maturities of three months or less. The
Company’s cash equivalents are comprised entirely of money
market funds maintained at a financially stable financial
institution. At various times during the three and six months ended
February 28, 2017, the Company’s main operating account
exceeded federally insured limits. The Company has never suffered a
loss due to such excess balance.
Investments in Securities
Management
determines the appropriate classification of its investments in
certificates of deposit and debt and equity securities at the time
of purchase and reevaluates such determinations each reporting
period.
Certificates of deposit and debt securities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. The Company has
$1,425,000 of investments classified as held-to-maturity at
February 28, 2017, which represent certificates of deposit with
maturity dates after February 28, 2018. Certificates of deposit and
debt securities that the Company does not have the positive intent
or ability to hold to maturity are classified as
available-for-sale, along with any investments in equity
securities. Securities classified as available-for-sale are
marked-to-market at each reporting period. Changes in value on such
securities are recorded as a component of Accumulated other
comprehensive income (loss).
The cost of securities sold is based on the specific identification
method. The Company’s marketable securities mature at various
dates through July 2018.
Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and investments. From time to time, the Company places
its cash in money market instruments, commercial paper obligations,
corporate bonds and U.S. government treasury obligations. To date,
the Company has not experienced significant losses on any of these
investments.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
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.
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 sheet and an off-balance sheet or “contingent”
obligation associated with the Company’s acquisition of its
“Rangeview Water Supply” (defined in
Note 4 – Water and
Land Assets to the 2016 Annual Report). The amount payable
is a fixed amount but is repayable only upon the sale of
“Export Water” (defined in Note 4 –
Water and Land Assets in
Part II, Item 8 of the 2016 Annual Report). Because of
the uncertainty of the sale of Export Water, the Company has
determined that the contingent portion of the CAA does not have a
determinable fair value. The CAA is described further in
Note 4 – Long-Term
Obligations and Operating Lease – Participating Interests in
Export Water Supply.
Notes Receivable – Related Parties – The market value of the notes
receivable – related parties from Rangeview Metropolitan
District (“Rangeview”) and Sky Ranch Metropolitan
District No. 5 are not practical to estimate due to the related
party nature of the underlying transactions.
Off-Balance Sheet Instruments – The Company’s
off-balance sheet instruments consist entirely of the contingent
portion of the CAA. Because repayment of this portion of the CAA is
contingent on the sale of Export Water, which is not reasonably
estimable, the Company has determined that the contingent portion
of the CAA does not have a determinable fair value. See further
discussion in Note 4 – Long-Term Obligations and Operating Lease
– Participating Interests in Export Water
Supply.
Revenue
Recognition
Wholesale Water and Wastewater Fees – Monthly
wholesale water usage charges are assessed to the Company’s
customers based on actual metered usage each month plus a base
monthly service fee. The Company recognizes wholesale water usage
revenues upon delivering water to its
customers or its governmental customer’s end-use customers,
as applicable. The Company recognized $190,700 and $27,400 of
metered water usage revenues during the three months ended February
28, 2017 and February 29, 2016, respectively. The Company
recognized $331,800 and $84,200 of metered water usage revenues
during the six months ended February 28, 2017 and February 29,
2016, respectively. For the three and six months ended February 28,
2017, the Company recognized approximately $14,000 of water usage
revenue related to its Wild Pointe Service Agreement (as defined
Note 3 – Water and Land Assets
below).
The Company recognizes wastewater treatment fees monthly based on
usage. The monthly wastewater treatment fees are shown net of
amounts retained by Rangeview. The Company recognized $11,200 and $10,700 of
wastewater treatment fees during the three months ended February
28, 2017 and February 29, 2016, respectively. The Company
recognized $23,500 and $21,000 of wastewater treatment fees during
the six months ended February 28, 2017 and February 29, 2016,
respectively. Costs of delivering water and providing wastewater
services to customers are recognized as
incurred.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
Tap and Construction Fees – The Company has various water and
wastewater service agreements, a component of which may include tap
and construction fees. The Company recognizes water tap fees from
wholesale commercial users as revenue ratably over the estimated
service period upon completion of the “Wholesale
Facilities” (defined in Part I, Item 1 of the 2016
Annual Report) constructed to provide service to Arapahoe County,
Colorado (the “County”). The Company recognized $3,600
and $7,100 of water tap fee revenues during each of the three and
six months ended February 28, 2017 and February 29,
2016,
respectively. The water tap fees to be recognized over this period
are net of the royalty payments to the Land Board and amounts paid
to third parties pursuant to the CAA as further described in
Note 4 – Long-Term Obligations and
Operating Lease below.
The Company recognized $10,400 and $20,800 of “Special
Facilities” (defined in Part I, Item 1 of the 2016
Annual Report) funding as revenue during each of the three and six
months ended February 28, 2017 and February 29, 2016, respectively.
This is the ratable portion of the Special Facilities funding
proceeds received from water agreements as more fully described in
Note 2 – Summary of Significant
Accounting Policies to the 2016
Annual Report.
As of February 28, 2017, and August 31, 2016, the Company had
deferred recognition of approximately $1,083,400 and $1,111,300,
respectively, of wholesale water tap and construction fee revenue
from the County, which will be recognized as revenue ratably over
the estimated useful accounting life of the assets constructed with
the construction proceeds as described above.
Consulting fees –
Consulting fees are fees the Company receives, typically on a
monthly basis, from municipalities and area water providers along
the I-70 corridor, for contract operations
services.
Royalty and Other Obligations
Revenues from the sale of Export Water are shown gross of royalties
payable to the Land Board. Revenues from the sale of water on the
Lowry Range (described in Note 4 –
Water and Land
Assets in Part II, Item 8
of the 2016 Annual Report) are shown net of the royalties to the
Land Board and the amounts retained by
Rangeview.
Oil and Gas Lease Payments
As further described in Note 2 –
Summary of
Significant Accounting Policies in Part II, Item 8 of the 2016 Annual Report, in
March 2011, the Company entered into a Paid-Up Oil and Gas Lease
(the "O&G Lease") and a Surface Use and Damage Agreement (the
"Surface Use Agreement") which were subsequently purchased by a
wholly owned subsidiary of ConocoPhillips Company. Pursuant to the
O&G Lease, during the year ended August 31, 2011, the Company
received an up-front payment of $1,243,400 for the purpose of
exploring for, developing, producing and marketing oil and gas on
approximately 634 acres of mineral estate owned by the Company at
its "Sky Ranch" property (described in Note 4 – Water and Land Assets
in Part II, Item 8 of the 2016 Annual
Report). The Company began recognizing the up-front payments as
income on a straight-line basis over three years (the initial term
of the O&G Lease) on March 10, 2011. The Company received an
additional payment of $1,243,400 during February 2014 to extend the
O&G Lease an additional two years through February 2016, which
was recognized as income on a straight-line basis over two years
(the extension term of the O&G Lease). During the fiscal year
ended August 31, 2014, the Company received an up-front payment of
$72,000 for the purpose of exploring for, developing, producing,
and marketing oil and gas on 40 acres of mineral estate the Company
owns adjacent to the Lowry Range (the "Rangeview Lease"). The
Company recognized $6,000 and $161,430 during the three months
ended February 28, 2017 and February 29, 2016, respectively, and
$12,000 and $322,900 during the six months ended February 28, 2017
and February 29, 2016, respectively, of lease income related to the
up-front payments received pursuant to the O&G Lease and the
Rangeview Lease.
As of February 28, 2017 and August 31, 2016, the Company had
deferred recognition of $7,000 and $19,000, respectively, of income
related to the O&G Lease and the Rangeview Lease, which will be
recognized into income ratably through June 2017.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
During
the three months ended February 28, 2015, two wells were drilled
within the Company’s mineral interest. Beginning in March
2015, both wells were placed into service and began producing oil
and gas and accruing royalties to the Company. In May 2015, certain
gas collection infrastructure was extended to the property to allow
the collection of gas from the wells and accrual of royalties
attributable to gas production. During the three and six months
ended February 28, 2017, the Company received $71,300 and $139,400,
respectively, in royalties attributable to these two wells. During
the three and six months ended February 29, 2016, the Company
received $72,500 and $194,600, respectively, in royalties
attributable to these two wells.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected
to be generated by the eventual use of the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
Capitalized Costs of Water and Wastewater Systems and Depletion and
Depreciation of Water Assets
Costs to construct water and wastewater systems that meet the
Company’s capitalization criteria are capitalized as
incurred, including interest, and depreciated on a straight-line
basis over their estimated useful lives of up to 30 years. The
Company capitalizes design and construction costs related to
construction activities, and it capitalizes certain legal,
engineering and permitting costs relating to the adjudication and
improvement of its water assets. The Company depletes its
groundwater assets that are being utilized on the basis of units
produced (i.e., thousands of gallons sold) divided by the total
volume of water adjudicated in the water decrees.
Share-Based Compensation
The Company maintains a stock option plan for the benefit of its
employees and non-employee directors. The Company records
share-based compensation costs as expense over the applicable
vesting period of the stock award using the straight-line method.
The compensation costs to be expensed are measured at the grant
date based on the fair value of the award. The Company has adopted
the alternative transition method for calculating the tax effects
of share-based compensation, which allows for a simplified method
of calculating the tax effects of employee share-based
compensation. Because the Company has a full valuation allowance on
its deferred tax assets, the granting and exercise of stock options
has no impact on the income tax provisions. The Company recognized
$64,500 and $55,200 of share-based compensation expense during the
three months ended February 28, 2017 and February 29, 2016,
respectively. The Company recognized $104,500 and $108,900 of
share-based compensation expense during the six months ended
February 28, 2017 and February 29, 2016, 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 28, 2017.
The Company files income tax returns with the Internal Revenue
Service and the State of Colorado. The tax years that remain
subject to examination are fiscal year 2014 through fiscal year
2016. The Company does not believe there will be any material
changes in its unrecognized tax positions over the next 12
months.
The Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income
tax expense. At February 28, 2017, the Company did not have any
accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized during the three
or six months ended February 28, 2017 or February 29,
2016.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
Discontinued Operations
In August 2015, the Company sold substantially all of its Arkansas
River water and land properties. Pursuant to the terms of the
purchase and sale agreement, the Company continued to manage and
receive the lease income until December 31, 2015. The
operating results and the assets and liabilities of the
discontinued operations, which formerly comprised the agricultural
segment, are presented separately in the Company’s
consolidated financial statements. Summarized financial information
for the discontinued agricultural business is shown below. Prior
period balances have been reclassified to present the operations of
the agricultural business as a discontinued operation.
Discontinued Operations Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farm
revenues
|
$6,034
|
$63,743
|
$6,034
|
$275,991
|
Farm
expenses
|
-
|
(17,736)
|
-
|
(33,368)
|
Gross profit
|
6,034
|
46,007
|
6,034
|
242,623
|
|
|
|
|
|
General
and administrative expenses
|
17,104
|
74,648
|
36,730
|
213,156
|
Operating (loss) profit
|
(11,070)
|
(28,641)
|
(30,696)
|
29,467
|
Finance
charges
|
8,421
|
-
|
9,367
|
-
|
Interest
expense
|
|
|
|
|
Income (loss) from discontinued operations
|
$(2,649)
|
$(28,641)
|
$(21,329)
|
$29,467
|
The Company anticipates continued expenses through calendar 2017
related to the discontinued operations. The Company will continue
to incur expenses (including property taxes) related to the
remaining 700 acres of agricultural land the Company continues to
own and for the purpose of collecting outstanding
receivables.
The individual assets and liabilities of the discontinued
agricultural operations are combined in Assets of discontinued
operation and
Liabilities of
discontinued operation in the
consolidated balance sheet. The carrying amounts of the major
classes of assets and liabilities that included part of the
discontinued business are presented in the following
table:
Discontinued Operations Balance Sheet
|
|
|
|
|
|
|
Assets:
|
|
|
Trade
accounts receivable, net
|
$122,608
|
$227,060
|
Land
held for sale (*)
|
449,795
|
450,347
|
Prepaid
expenses
|
-
|
2,880
|
Total
assets
|
$572,403
|
$680,287
|
|
|
|
Liabilities:
|
|
|
Accrued
liabilities
|
7,690
|
4,394
|
Total
liabilities
|
$7,690
|
$4,394
|
(*) Land Held for Sale. During
the fiscal quarter ended November 30, 2015, the Company purchased
three farms for approximately $450,300. The Company acquired a
total of 700 acres. The farms were acquired in order to correct
dry-up covenant issues related to water only farms in order obtain
the release of the escrow funds related to the Company’s farm
sale to Arkansas River Farms, LLC. The Company intends to sell the
farms during fiscal year 2017.
Income (Loss) per Common Share
Income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares outstanding during
each period. Common stock options and warrants aggregating 480,500
and 348,100 common share equivalents were outstanding as of
February 28, 2017 and February 29, 2016, respectively, and have
been included in the calculation of net income per common share but
excluded from the calculation of loss per common share as their
effect is anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements
to determine their applicability. When it is determined that a new
accounting pronouncement affects the Company’s financial
reporting, the Company undertakes a study to determine the
consequence of the change to its consolidated financial statements
and ensure that there are proper controls in place to ascertain
that the Company’s consolidated financial statements properly
reflect the change. New pronouncements assessed by the
Company recently are discussed below:
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
In May
2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-12,
Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients. ASU 2016-12 provides for amendments to ASU No.
2014-09, Revenue from Contracts
with Customers, amending the guidance on transition,
collectability, noncash consideration and the presentation of sales
and other similar taxes. Specifically, ASU 2016-12 clarifies that,
for a contract to be considered completed at transition, all (or
substantially all) of the revenue must have been recognized under
legacy GAAP. In addition, ASU 2016-12 clarifies how an entity
should evaluate the collectability threshold and when an entity can
recognize nonrefundable consideration received as revenue if an
arrangement does not meet the standard’s contract criteria.
The Company is assessing the impact of ASU 2016-12, but it does not
expect the adoption of ASU 2016-12 to have a material impact on its
financial statements.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing. ASU
2016-10 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers,
reducing the complexity when applying the guidance for identifying
performance obligations and improving the operability and
understandability of the license implementation guidance. The
Company is assessing the impact of ASU 2016-10, but it does not
expect the adoption of ASU 2016-10 to have a material impact on its
financial statements.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net). ASU 2016-08 provides for amendments to
ASU No. 2014-09, Revenue from
Contracts with Customers, clarifying the implementation
guidance on principal versus agent considerations in the new
revenue recognition standard. Specifically, ASU 2016-08 clarifies
how an entity should identify the unit of accounting (i.e., the
specified good or service) for the principal versus agent
evaluation and how it should apply the control principle to certain
types of arrangements. The Company is assessing the impact of ASU
2016-08, but it does not expect the adoption of ASU 2016-08 to have
a material impact on its financial statements.
In May,
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606), which supersedes the revenue recognition requirements
in “Revenue Recognition (Topic 605),” and requires
entities to recognize revenue in a way that depicts the transfer of
potential goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to the
exchange for those goods or services. The Company will adopt the
guidance on September 1, 2018. The Company does not expect the
adoption of ASU 2014-09 to have a material impact on its wholesale
water and wastewater and consulting fees as the underlying
contracts with these customers are relatively straightforward and
contain no complex components. The Company is currently assessing
the impact of ASU 2014-09 on its water and wastewater tap and
construction fees. The Company anticipates this assessment to be
completed in fiscal 2017.
In
April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic
205) and Property, Plant, and Equipment (Topic
360): Reporting
Discontinued Operations and Disclosures of Disposals of Components
of an Entity. ASU 2014-08 changes the presentation and
disclosure requirements for discontinued operations. The update was
adopted by the Company in fiscal year 2016.
NOTE 2 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the
principal or most advantageous market. The Company uses a fair
value hierarchy that has three levels of inputs, both observable
and unobservable, with use of the lowest possible level of input to
determine fair value.
Level 1 — Valuations for assets and liabilities traded in
active exchange markets, such as the NASDAQ Stock Market. The
Company had none of these instruments as of February 28, 2017 and
none of these instruments as of August 31, 2016.
Level 2 — Valuations for assets and liabilities obtained from
readily available pricing sources via independent providers for
market transactions involving similar assets or liabilities.
The Company had 51 and 36 Level 2 assets as of February 28, 2017
and August 31, 2016, respectively, which consisted of certificates
of deposit and U.S. treasury notes.
Level 3 — Valuations for assets and liabilities that are
derived from other valuation methodologies, including discounted
cash flow models and similar techniques, and not based on market
exchange, dealer, or broker-traded transactions. Level 3 valuations
incorporate certain assumptions and projections in determining the
fair value assigned to such assets or liabilities. The Company had
no Level 3 assets or liabilities as of February 28, 2017 or August
31, 2016.
The Company maintains policies and procedures to value instruments
using what management believes to be the best and most relevant
data available.
Level 2 Asset – Available for Sale Securities.
The Company’s available for sale
securities are the Company’s only financial asset with fair
value measured on a recurring basis. At February 28, 2017, these securities
include only federally insured certificates of deposit and U.S.
treasury notes.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
The following table provides information on the assets and
liabilities measured at fair value on a recurring basis as
of February 28, 2017:
|
|
|
Fair
Value Measurement Using:
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Accumulated
Unrealized Gains and
|
|
|
|
|
|
|
|
Marketable
securities
|
$21,386,422
|
$21,421,314
|
$-
|
$21,386,422
|
$-
|
$(34,892)
|
NOTE 3 – WATER AND LAND ASSETS
Wild Pointe
On
December 15, 2016, Rangeview, 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 "EH86 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 Rangeview as Rangeview's
exclusive service provider, the Company acquired, among other
things, the exclusive right to provide water services to
residential and commercial customers in Wild Pointe Ranch, 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 Rangeview's
service provider, is responsible for providing water services to
all users of water services within the boundaries and service area
of the EH86 District and for operating and maintaining the EH86
District's water system. In exchange, the Company receives all
rates, fees and charges remitted to Rangeview by the EH86 District
pursuant to the Wild Pointe Service Agreement, including system
development (or tap) fees from new customers and monthly water
service revenues. The EH86 District's water system currently
provides water service to approximately 120 existing SFE water
connections in Wild Pointe.
The Company’s Investments in Water and Water Systems consist
of the following costs and accumulated depreciation and depletion
at February 28, 2017 and August 31, 2016:
|
|
|
|
|
Accumulated
Depreciation and Depletion
|
|
Accumulated
Depreciation and Depletion
|
Rangeview
water supply
|
$14,475,900
|
$(9,700)
|
$14,444,600
|
$(9,400)
|
Sky
Ranch water rights and other costs
|
6,660,400
|
(386,700)
|
6,607,400
|
(334,500)
|
Fairgrounds
water and water system
|
2,899,900
|
(930,800)
|
2,899,900
|
(886,800)
|
Rangeview
water system
|
1,637,800
|
(179,800)
|
1,624,800
|
(152,800)
|
Water
supply – other
|
3,790,500
|
(349,600)
|
3,703,000
|
(297,800)
|
Wild
Pointe service rights
|
1,661,000
|
(26,000)
|
-
|
-
|
Construction
in progress
|
4,499,600
|
-
|
723,500
|
-
|
Totals
|
35,625,100
|
(1,882,600)
|
30,003,200
|
(1,681,300)
|
Net
investments in water and water systems
|
$33,742,500
|
|
$28,321,900
|
|
Construction
in progress relates to the Sky Ranch project and includes
engineering and other initial costs (approximatley $949,000) and
water line installation (approximately $3.5 million). An
additional approximately $700,000 is expected to be incurred over
the next two months related to the water line
installation.
Capitalized terms in this section not defined herein are defined in
Note 4 – Water and Land Assets
in Part II, Item 8 of the
2016 Annual Report.
Depletion and Depreciation. The
Company recorded depletion charges of $200 and $40 during the three
month periods ended February 28, 2017 and February 29, 2016,
respectively. The Company recorded depletion charges of $500 and
$100 during the six months ended February 28, 2017 and February 29,
2016, respectively. During the three and six months ended February
28, 2017, this related entirely to the Rangeview Water Supply and
the Sky Ranch water assets.
The Company recorded $141,800
and $104,500 of depreciation expense during the three months ended
February 28, 2017 and February 29, 2016, respectively. The Company
recorded $257,600 and $199,000
of depreciation expense during the six months ended February 28,
2017 and February 29, 2016, respectively.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
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 beginning in the early 1990s. The
acquisition was consummated with the signing of the CAA in 1996.
Upon entering into the CAA, the Company recorded an initial
liability of $11.1 million, which represented the cash the Company
received from the participating interest holders that was used to
purchase the Company’s Export Water (described in greater
detail in Note 4 – Water and Land Assets
to the 2016 Annual Report). The
Company agreed to remit a total of $31.8 million of proceeds
received from the sale of Export Water to the participating
interest holders in return for their initial $11.1 million
investment. The obligation for the $11.1 million was recorded as
debt, and the remaining $20.7 million contingent liability was not
reflected on the Company’s balance sheet because the
obligation to pay this is contingent on the sale of Export Water,
the amounts and timing of which are not reasonably
determinable.
The CAA obligation is non-interest bearing, and if the Export Water
is not sold, the parties to the CAA have no recourse against the
Company. If the Company does not sell the Export Water, the holders
of the Series B Preferred Stock are also not entitled to payment of
any dividend and have no contractual recourse against the
Company.
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 six months ended February 28, 2017 or
February 29, 2016.
As a result of the acquisitions and sales of Export Water, as
detailed in the table below, the remaining potential third-party
obligation at February 28, 2017, is approximately $1 million, and
the Company has the right to approximately $29.7 million in Export
Water proceeds:
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
|
Export
Water Proceeds Received
|
Initial
Export Water Proceeds to Pure Cycle
|
Total
Potential Third-Party Obligation
|
Paticipating
Interests Liability
|
|
Original
balances
|
$–
|
$218,500
|
$31,807,700
|
$11,090,600
|
$20,717,100
|
Activity from inception until August 31, 2015:
|
|
|
|
|
|
Acquisitions
|
–
|
28,042,500
|
(28,042,500)
|
(9,790,000)
|
(18,252,500)
|
Relinquishment
|
–
|
2,386,400
|
(2,386,400)
|
(832,100)
|
(1,554,300)
|
Option payments - Sky Ranch
|
|
|
|
|
|
and The Hills at Sky Ranch
|
110,400
|
(42,300)
|
(68,100)
|
(23,800)
|
(44,300)
|
Arapahoe County tap fees *
|
533,000
|
(373,100)
|
(159,900)
|
(55,800)
|
(104,100)
|
Export Water sale payments
|
618,400
|
(489,100)
|
(129,300)
|
(44,900)
|
(84,400)
|
Balance
at August 31, 2016
|
1,261,800
|
29,742,900
|
1,021,500
|
344,000
|
677,500
|
Fiscal 2017 activity:
|
|
|
|
|
|
Export Water sale payments
|
46,000
|
(40,500)
|
(5,500)
|
(1,900)
|
(3,600)
|
Balance
at February 28, 2017
|
$1,307,800
|
$29,702,400
|
$1,016,000
|
$342,100
|
$673,900
|
* The Arapahoe County tap fees are net of $34,522 in
royalties paid to the Land Board.
The CAA includes contractually established priorities that call for
payments to CAA holders in order of their priority. This means the
first payees receive their full payment before the next priority
level receives any payment and so on until full repayment. The
Company will receive approximately $5.9 million of the first
priority payout (the remaining entire first priority payout totals
approximately $6.7 million as of February 28, 2017).
WISE Partnership
During December 2014, the Company, through Rangeview, 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 Rangeview and nine
other governmental or quasi-governmental water providers pursuant
to the South Metro WISE Authority Formation and Organizational
Intergovernmental Agreement, dated December 31, 2013 (the “SM
IGA”), to enable the members of SMWA to participate in the
regional water supply project known as the Water Infrastructure
Supply Efficiency partnership (“WISE”) created by the
WISE Partnership Agreement. The SM IGA specifies each
member’s pro rata share of WISE and the members’ rights
and obligations with respect to WISE. The WISE Partnership
Agreement provides for the purchase of certain infrastructure
(i.e., pipelines, water storage facilities, water treatment
facilities, and other appurtenant facilities) to deliver water to
and among the 10 members of the SMWA, Denver Water and Aurora
Water. Certain infrastructure has been constructed, and other
infrastructure will be constructed over the next several
years.
By consenting to the waiver of the contingencies set forth in the
WISE Partnership Agreement, pursuant to the terms of the
Rangeview/Pure Cycle WISE Project Financing Agreement (the
“WISE Financing Agreement”) between the Company and
Rangeview, the Company has an agreement to fund Rangeview’s
participation in WISE effective as of December 22, 2014. The
Company’s cost of funding Rangeview’s purchase of its
share of existing infrastructure and future infrastructure for WISE
and funding operations and water deliveries related to WISE is
projected to be approximately $5.6 million over the next five
years. See further discussion in
Note 6 – Related Party
Transactions.
Operating Lease
Effective January 2017, the Company entered into an operating lease
for approximately 2,500 square feet of office and warehouse space.
The lease has a one-year term with payments of $3,000 per
month.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
NOTE 5 – SHAREHOLDERS’ EQUITY
The Company maintains the 2014 Equity Incentive Plan (the
“2014 Equity Plan”), which was approved by shareholders
in January 2014 and became effective April 12, 2014. Executives,
eligible employees, consultants and non-employee directors are
eligible to receive options and stock grants pursuant to the 2014
Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase
shares of stock and restricted stock awards can be granted with
exercise prices, vesting conditions and other performance criteria
determined by the Compensation Committee of the board of directors.
The Company has reserved 1.6 million shares of common stock for
issuance under the 2014 Equity Plan. The Company began awarding
options under the 2014 Equity Plan during January 2015. Prior to
the effective date of the 2014 Equity Plan, the Company granted
stock awards to eligible participants under its 2004 Incentive Plan
(the “2004 Incentive Plan”), which expired April 11,
2014. No additional awards may be granted pursuant to the 2004
Incentive Plan; however, awards outstanding as of April 11, 2014,
will continue to vest and expire and may be exercised in accordance
with the terms of the 2004 Incentive Plan.
The following table summarizes the combined stock option activity
for the 2004 Incentive Plan and 2014 Equity Plan for the six months
ended February 28, 2017:
|
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Approximate
Aggregate Instrinsic Value
|
Oustanding
at August 31, 2016
|
338,000
|
$4.83
|
|
|
Granted
|
142,500
|
5.47
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
or expired
|
-
|
-
|
|
|
Outstanding
at February 28, 2017
|
480,500
|
$4.98
|
6.59
|
$304,765
|
|
|
|
|
|
Options
exercisable at February 28, 2017
|
333,000
|
$4.78
|
5.24
|
$297,640
|
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 28,
2017:
|
|
Weighted-Average
Grant Date Fair Value
|
Non-vested
options oustanding at August 31, 2016
|
36,000
|
$4.59
|
Granted
|
142,500
|
3.67
|
Vested
|
(31,000)
|
2.95
|
Forfeited
|
-
|
-
|
Non-vested
options outstanding at February 28, 2017
|
147,500
|
$3.52
|
All non-vested options are expected to vest.
Stock-based compensation expense was $64,500 and $55,200 for the
three months ended February 28, 2017 and February 29, 2016,
respectively. Stock-based compensation expense was $104,500 and
$108,900 for the six months ended February 28, 2017 and February
29, 2016, respectively.
At February 28, 2017, the Company had unrecognized expenses
totaling $456,000 relating to non-vested options that are expected
to vest, which options have a weighted average life of less than
three years. The Company has not recorded any excess tax benefits
to additional paid-in capital.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
NOTE 6 – RELATED PARTY TRANSACTIONS
Rangeview
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. Rangeview is governed by an elected board of
directors. Eligible voters and persons eligible to service as
director of Rangeview 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. The current
directors of Rangeview include three employees of the Company, and
two independent board members.
In 1995, the Company extended a loan to Rangeview, a related party.
The loan provided for borrowings of up to $250,000, is unsecured,
and bears interest based on the prevailing prime rate plus 2%
(5.50% at February 28, 2017), and the maturity date of the loan is
December 31, 2022. Beginning in January 2014, Rangeview and the
Company entered into a funding agreement that allows the Company to
continue to provide funding to Rangeview for day-to-day operations
and accrue the funding into a note that bears interest at a rate of
8% per annum and remains in full force and effect for so long as
the 2014 Amended and Restated Lease Agreement remains in
effect. The $678,900 balance of
the note receivable at February 28, 2017, includes borrowings of
$308,700 and accrued interest of $370,200.
On December 16, 2009, the Company entered into a Participation
Agreement with Rangeview, whereby the Company agreed to provide
funding to Rangeview in connection with Rangeview joining the South
Metro Water Supply Authority (“SMWSA”). On November 10,
2014, the Company and Rangeview entered into the WISE Financing
Agreement, which became effective December 23, 2014, whereby
the Company agreed to fund Rangeview’s cost of participating
in a regional water supply project known as the WISE partnership.
The Company anticipates spending approximately $5.6 million over
the next five fiscal years to fund Rangeview’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.
Each year, beginning in 2012, the Company has entered into an
Operation Funding Agreement with Sky Ranch Metropolitan District
No. 5 obligating the Company to advance funding to the district for
the district’s operations and maintenance expenses for the
then-current calendar year. The district is expected to repay the
amounts advanced pursuant to the funding agreements from future
revenues from property tax assessments. All payments are subject to
annual appropriations by the district in its absolute discretion.
The advances by the Company accrue interest at a rate of 8% per
annum from the date of the advance.
In November 2014, but effective as of January 1, 2014, the
Company entered into a Facilities Funding and Acquisition Agreement
with Sky Ranch Metropolitan District No. 5 obligating the Company
to either finance district improvements or to construct
improvements on behalf of the district subject to reimbursement.
Improvements subject to this agreement are determined pursuant to a
mutually agreed upon budget. Each year in September, the parties
are to mutually determine the improvements required for the
following year and finalize a budget by the end of October. Each
advance or reimbursable expense accrues interest at a rate of 6%
per annum. No payments are required by the district unless and
until the district issues bonds in an amount sufficient to
reimburse the Company for all or a portion of the advances and
costs incurred.
The $187,600 balance of the receivable due pursuant to the
Operation Funding Agreements and the Facilities Funding and
Acquisition Agreement at February 28, 2017, includes advances of
$160,600 and accrued interest of $27,000. Upon the district’s
ratification of the advances and related expenditures, the amount
was reclassified to long-term and is recorded as part of Notes
receivable – related parties.
On October 12, 2016, the Audit Committee of the Company’s
board of directors approved accepting a bid submitted by Nelson
Pipeline Constructors LLC to construct a pipeline connecting its
Sky Ranch water system to Rangeview’s water system for
approximately $4.1 million (the “Nelson Bid”). Nelson
Pipeline Constructors LLC is a wholly owned subsidiary of Nelson
Infrastructure Services LLC, a company in which Patrick J. Beirne
owns a 50% interest. In addition, Mr. Beirne, a director of Pure
Cycle, is Chairman and Chief Executive Officer of each of Nelson
Pipeline Constructors LLC and Nelson Infrastructure Services LLC.
Since Mr. Nelson is the 50% owner of the parent company of Nelson
Pipeline Constructors LLC, Mr. Nelson’s interest in the
transaction is approximately $2.05 million without taking into
account any profit or loss from the Nelson Bid. Pursuant to the
Company’s policies for review and approval of related party
transactions, the Nelson Bid was reviewed and approved by the Audit
Committee and by the board of directors, with Mr. Beirne
abstaining. The Nelson Bid was the lowest bid received by the
Company in connection with the Sky Ranch pipeline project and was
lower than the Company’s estimated cost to construct the
pipeline on its own.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FEBRUARY 28, 2017
NOTE 7 – SIGNIFICANT CUSTOMERS
The Company sells wholesale water and wastewater services to
Rangeview pursuant to the Rangeview Water Agreements (defined in
Note 4 – Water and Land Assets
in Part II, Item 8 of the
2016 Annual Report). Sales to Rangeview accounted for 27%
and 76% of the Company’s
total water and wastewater revenues for the three months ended
February 28, 2017 and February 29, 2016, respectively. Sales to
Rangeview accounted for 28% and 66% of the Company’s total water and
wastewater revenues for the six months ended February 28, 2017 and
February 29, 2016, respectively. Rangeview has one significant
customer. Pursuant to the Rangeview Water Agreements, the Company
is providing water and wastewater services to this customer on
behalf of Rangeview. Rangeview’s significant customer
accounted for 16% and 89% of
the Company’s total water and wastewater revenues for the
three months ended February 28, 2017 and February 29, 2016,
respectively. Rangeview’s significant customer accounted for
23% and 76% of the
Company’s total water and wastewater revenues for the six
months ended February 28, 2017 and February 29, 2016,
respectively.
Revenues related to the provision of water for the oil and gas
industry to one customer accounted for 70% and 62%
of the Company’s water and
wastewater revenues for the three and six months ended February 28,
2017, respectively. The Company had no revenues related to the
provision of water for the oil and gas industry for the three and
six months ended February 29, 2016.
The Company had accounts receivable from Rangeview that accounted
for 90% and 74% of the Company’s trade receivables balances
at February 28, 2017 and August 31, 2016, respectively. Accounts
receivable from Rangeview’s largest customer accounted for
74% and 63% of the Company’s trade receivables as of February
28, 2017 and August 31, 2016, respectively.
NOTE 8 – ACCRUED LIABILITIES
At February 28, 2017, the Company had accrued liabilities of
$100,100, of which $10,000 was for estimated property taxes,
$49,500 was for professional fees, and $40,600 was for operating
payables.
At August 31, 2016, the Company had accrued liabilities of
$242,600, of which $160,000 was for accrued compensation, $5,700
was for estimated property taxes, $48,000 was for professional fees
and the remaining $28,900 was related to operating
payables.
NOTE 9 – LITIGATION LOSS CONTINGENCIES
The Company has historically been involved in various claims,
litigation and other legal proceedings that arise in the ordinary
course of its business. The Company records an accrual for a loss
contingency when its occurrence is probable and damages can be
reasonably estimated based on the anticipated most likely outcome
or the minimum amount within a range of possible outcomes. The
Company makes such estimates based on information known about the
claims and experience in contesting, litigating and settling
similar claims. Disclosures are also provided for reasonably
possible losses that could have a material effect on the
Company’s financial position, results of operations or cash
flows.
NOTE 10 – SEGMENT INFORMATION
Prior to the sale of the Company’s agricultural assets and
the residual operations through December 31, 2015, the Company
operated primarily in two lines of business: (i) the wholesale
water and wastewater business; and (ii) the agricultural
farming business. The Company has discontinued its agricultural
farming operations. The Company will continue to operate its
wholesale water and wastewater services segment as its only line of
business. The wholesale water and wastewater services business
includes selling water service to customers using water rights
owned by the Company and developing infrastructure to divert, treat
and distribute that water and collect, treat and reuse
wastewater.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
The discussion and analysis below includes certain forward-looking
statements that are subject to risks, uncertainties and other
factors, as described in “Risk Factors” in our Annual
Report on Form 10-K, that could cause our actual growth, results of
operations, performance, financial position and business prospects
and opportunities for this fiscal year and periods that follow to
differ materially from those expressed in or implied by those
forward-looking statements. Readers are cautioned that
forward-looking statements contained in this Quarterly Report on
Form 10-Q should be read in conjunction with our disclosure under
the heading “Disclosure Regarding Forward-Looking
Statements” below.
The following Management's Discussion and Analysis ("MD&A") is
intended to help the reader understand our results of operations
and financial condition and should be read in conjunction with the
accompanying consolidated financial statements and the notes
thereto and the financial statements and the notes thereto
contained in our Annual Report on Form 10-K for the fiscal year
ended August 31, 2016 (the "2016 Annual Report"). This section
focuses on the key indicators reviewed by management in evaluating
our financial condition and operating performance, including the
following:
●
Revenue
generated from providing water and wastewater
services;
●
Expenses
associated with developing our water and land assets;
and
●
Cash
available to continue development of our water rights, land assets
and service agreements.
Our MD&A section includes the following items:
Our
Business –
a general description of our business,
our services and our business strategy.
Results of
Operations –
an analysis of our results of operations for the
periods presented in our consolidated financial statements. We
present our discussion in the MD&A in conjunction with the
accompanying financial statements.
Liquidity, Capital
Resources and Financial Position –
an analysis of our cash position and
cash flows, as well as a discussion of our financial
obligations.
Critical Accounting
Policies and Estimates –
a discussion of our critical
accounting policies that require critical judgments, assumptions
and estimates.
Our Business
Pure
Cycle Corporation (“we,” “us,” or
“our”) is a Colorado corporation that (i) provides
wholesale water and wastewater services to end-use customers of
governmental entities and to commercial, industrial and residential
customers and (ii) develops our land assets for residential,
commercial, and industrial uses.
Wholesale Water and Wastewater
These
services include water production, storage, treatment, bulk
transmission to retail distribution systems, wastewater collection
and treatment, irrigation water treatment and transmission,
construction management, billing and collection and emergency
response.
We are
a vertically integrated wholesale water and wastewater provider,
which means we own or control substantially all assets necessary to
provide wholesale water and wastewater services to our customers.
This includes owning (i) water rights which we use to provide
domestic, irrigation, and industrial water to our wholesale
customers (we own surface water, groundwater, reclaimed water
rights and storage rights); (ii) infrastructure (such as
wells, diversion structures, pipelines, reservoirs and treatment
facilities) required to withdraw, treat, store and deliver water;
(iii) infrastructure required to collect, treat, store and
reuse wastewater; and (iv) infrastructure required to treat
and deliver reclaimed water for irrigation use.
We own or control approximately 26,985 acre feet of surface water,
non-tributary, and not non-tributary groundwater rights, and
approximately 26,000 acre feet of adjudicated reservoir sites that
we refer to as our “Rangeview Water Supply.” This water
is located in the southeast Denver metropolitan area on a 27,000
acre parcel of land which is owned by the State Board of Land
Commissioners (the “Land Board”) known as the
“Lowry Range.” Of the approximately 26,985 acre feet of
water comprising our Rangeview Water Supply, we own 11,650 acre
feet of water which we can export from the Lowry Range
(“Export Water”), which consists of 10,000 acre feet of
groundwater and 1,650 acre feet of average yield surface water,
pending completion by the Land Board of documentation related to
the exercise of our right to substitute 1,650 acre feet of our
groundwater for a comparable amount of surface water. Additionally,
assuming the completion of the substitution of groundwater for
surface water, we hold the exclusive right to develop and deliver
through the year 2081 the remaining 12,035 acre feet of groundwater
and approximately 1,650 acre feet of average yield surface water to
customers either on or off of the Lowry Range.
We
currently provide wholesale water and wastewater service
predominantly to two local governmental entity customers. Our
largest wholesale domestic customer is the Rangeview Metropolitan
District (“Rangeview”). We provide service to Rangeview
and its end-use customers pursuant to the Rangeview Water
Agreements (defined in Part I, Item 1 –
Business – Our Water
and Land Assets in the 2016 Annual Report). Through
Rangeview, including through our recently acquired Wild Pointe
Service Agreement, we serve 378 Single Family Equivalent
(“SFE”) water connections and 157 SFE wastewater
connections located in southeastern metropolitan Denver. In the
past three years, we have been providing water to industrial
customers in the oil and gas industry located in and adjacent to
our service areas for the purpose of hydraulic fracturing. Oil and
gas operators have leased more than 135,000 acres within and
adjacent to our service areas for the purpose of exploring oil and
gas interests in the Niobrara and other formations, and this
activity had led to increased water demands. As a result of the
recent decline in oil prices, drilling has been significantly
reduced, and we are currently selling water to the oil and gas
industry for the purpose of hydraulic fracturing.
We plan
to utilize our significant water assets along with our adjudicated
reservoir sites to provide wholesale water and wastewater services
to local governmental entities, which in turn will provide
residential/commercial water and wastewater services to communities
along the eastern slope of Colorado in the area generally referred
to as the Front Range. Principally we target the I-70 corridor,
which is located east of downtown Denver and south of Denver
International Airport. This area is predominantly undeveloped and
is expected to experience substantial growth over the next 30
years. We also plan to continue to provide water service to
commercial and industrial customers.
Sky Ranch
We also
own 931 acres of land, zoned as a Master Planned Community along
the I-70 corridor east of Denver, Colorado. We are currently
negotiating agreements with homebuilders for the development and
sale of residential lots for single family homes. In anticipation
of developing this land, we are installing approximately eight
miles of water transmission lines at an estimated cost of $4.2
million to connect our Lowry Range water system to Sky Ranch.
Approximately $3.5
million of these costs have been incurred through February 28, 2017
and are included in construction in progress. The remaining
estimated costs are expected to be incurred over the next two
months.
Wild Pointe
On
December 15, 2016, Rangeview, 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 "EH86 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 our engagement by Rangeview as Rangeview's exclusive
service provider, we acquired, among other things, the exclusive
right to provide water services to residential and commercial
customers in Wild Pointe Ranch, located 15 miles south of the Lowry
Range in unincorporated Elbert County, Colorado, in exchange for
$1,600,000 in cash. Pursuant to the terms of the Wild Pointe
Service Agreement, we, in our capacity as Rangeview's service
provider, are responsible for providing water services to all users
of water services within the boundaries and service area of the
EH86 District and for operating and maintaining the EH86 District's
water system. In exchange, we receive all rates, fees and charges
remitted to Rangeview by the EH86 District pursuant to the Wild
Pointe Service Agreement, including system development (or tap)
fees from new customers and monthly water service revenues. The
EH86 District's water system currently provides water service to
approximately 120 existing SFE water connections in Wild Pointe
Ranch and may grow to over 300 SFE water connections.
Discontinued Agricultural Operations and Leasing
On August 18, 2015, we and our wholly owned subsidiary, PCY
Holdings, LLC, sold approximately 14,600 acres of real property and
related water rights in the Fort Lyon Canal Company
(“FLCC”) to Arkansas River Farms, LLC, for
approximately $45.8 million in cash. Pursuant to the purchase and
sale agreement, we retained our farm leasing operations through
December 31, 2015.
After closing the sale of our farm portfolio, we purchased
approximately 700 acres of real property in the area to resolve
certain dry-up covenants on three properties in order to obtain the
release of the remaining approximately $1.3 million in proceeds
from the sale. During the quarter ended February 29, 2016,
after resolving the dry-up covenant issues, the escrow proceeds
were distributed to us, and the 700 acres are held as “land
for sale” within Assets of discontinued
operations.
We have discontinued our farm operations and will continue to
liquidate the remaining assets in this line of
business.
This land interest is described in the Arkansas River Assets
section of
Note 4 – Water and Land Assets
in Part II, Item 8 of the
2016 Annual Report.
Results of Operations
Executive Summary
The results of our operations for the three and six months ended
February 28, 2017 and February 29, 2016 are as
follows:
|
|
|
|
|
|
|
|
|
Millions
of gallons of water delivered
|
17.7
|
2.7
|
15.0
|
556%
|
Metered
water usage revenues
|
$190,700
|
$27,400
|
$163,300
|
596%
|
Operating
costs to deliver water
|
$77,700
|
$58,500
|
$19,200
|
33%
|
(excluding depreciation and depletion)
|
|
|
|
|
Water delivery gross margin %
|
59%
|
-114%
|
|
|
|
|
|
|
|
Wastewater
treatment revenues
|
$11,200
|
$10,700
|
$500
|
5%
|
Operating
costs to treat wastewater
|
$7,400
|
$6,200
|
$1,200
|
19%
|
Wastewater treatment gross margin %
|
34%
|
42%
|
|
|
|
|
|
|
|
Other
income
|
$21,200
|
$24,400
|
$(3,200)
|
-13%
|
Other
income costs incurred
|
$16,000
|
$14,700
|
$1,300
|
9%
|
Other
income gross margin %
|
25%
|
40%
|
|
|
|
|
|
|
|
Tap
and specialty facility revenues
|
$13,900
|
$13,900
|
$-
|
0%
|
|
|
|
|
|
General
and administrative expenses
|
$449,500
|
$449,300
|
$200
|
0%
|
Loss
from continuing operatons
|
$(314,600)
|
$(242,000)
|
$(72,600)
|
30%
|
Loss
from discontinued operations
|
$(2,600)
|
$(28,600)
|
$26,000
|
91%
|
Net
loss
|
$(317,300)
|
$(270,700)
|
$(46,600)
|
-17%
|
|
|
|
|
|
|
|
|
|
Millions
of gallons of water delivered
|
35.6
|
10.6
|
25.0
|
236%
|
Metered
water usage revenues
|
$331,800
|
$84,200
|
$247,600
|
294%
|
Operating
costs to deliver water
|
$157,600
|
$125,800
|
$31,800
|
25%
|
(excluding depreciation and depletion)
|
|
|
|
|
Water delivery gross margin %
|
53%
|
-49%
|
|
|
|
|
|
|
|
Wastewater
treatment revenues
|
$23,500
|
$21,000
|
$2,500
|
12%
|
Operating
costs to treat wastewater
|
$15,000
|
$13,300
|
$1,700
|
13%
|
Wastewater treatment gross margin %
|
36%
|
37%
|
|
|
|
|
|
|
|
Other
income
|
$53,000
|
$69,300
|
$(16,300)
|
-24%
|
Other
income costs incurred
|
$32,300
|
$30,600
|
$1,700
|
6%
|
Other
income gross margin %
|
39%
|
56%
|
|
|
|
|
|
|
|
Tap
and specialty facility revenues
|
$27,900
|
$27,900
|
$-
|
0%
|
|
|
|
|
|
General
and administrative expenses
|
$892,800
|
$889,100
|
$3,700
|
0%
|
Loss
from continuing operatons
|
$(633,900)
|
$(397,700)
|
$(236,200)
|
59%
|
Income
(loss) from discontinued operations
|
$(21,300)
|
$29,500
|
$(50,800)
|
-172%
|
Net
loss639100
|
$(655,300)
|
$(368,200)
|
$(287,100)
|
78%
|
Changes in Revenues
Metered Water Usage
Revenues – Our water
service charges include a fixed monthly fee and a fee based on
actual amounts of metered water delivered, which is based on a
tiered pricing structure that provides for higher prices as
customers use greater amounts of water. Our rates and charges are
established based on the average rates and charges of three
surrounding water providers.
Water deliveries increased 563% and water revenues increased 596%
during the three months ended February 28, 2017, compared to the
three months ended February 29, 2016. The increase in water
deliveries and revenues is primarily the result of an increase in
demand for water by the oil and gas industry, which was used
primarily to frack a well drilled in the Niobrara formation. Water
deliveries increased 211% and water revenues increased 294% during
the six months ended February 28, 2017, compared to the six months
ended February 29, 2016. This increase was due to a higher demand
for water by the oil and gas industry during the current six month
period compared to the prior corresponding period. As a result of
the difference in metered rates for fracking water compared to
rates for tap customers, revenues received for fracking water have
a greater margin. Increases and decreases in water deliveries
charged at different rates will result in disproportionate
increases and decreases in revenues. The following table details
the sources of our sales, the number of kgal (1,000 gallons) sold,
and the average price per kgal for the three and six months ended
February 28, 2017 and February 29, 2016, respectively.
Table 2a - Water Revenue Summary
|
|
|
|
|
|
Customer
Type
|
|
|
|
|
|
|
On
Site
|
$44,000
|
1,434.4
|
$30.7
|
$23,600
|
2,639.3
|
$8.9
|
Export
- Commercial
|
5,200
|
315.1
|
16.5
|
3,800
|
47.0
|
80.9
|
Fracking
|
141,500
|
13,350.1
|
10.6
|
-
|
-
|
-
|
|
$190,700
|
15,099.6
|
$12.63
|
$27,400
|
2,686.3
|
$10.2
|
The gross margin on delivering water increased to 59% and 53%
during the three and six months ended February 28, 2017,
respectively, compared to a negative margin of 114% and 49% during
the three and six months ended February 29, 2016, respectively, due
to an increase in water deliveries which offset certain fixed
costs. The Company is obligated to pay certain lease and operating
costs related to the ECCV system (defined under Liquidity, Capital Resources
and Financial Position below).
The system costs approximately $8,000 per month to maintain without
any production. We had significant production through the ECCV
system related to the oil and gas water deliveries for the three
and six months ended February 28, 2017, which has positively
impacted our gross margin.
Wastewater Treatment Revenues – Our wastewater customer is charged based on the
amount of wastewater treated.
Wastewater fees increased 5% and 12% during the three and six
months ended February 28, 2017, compared to the three and six
months ended February 29, 2016, respectively. The increases were
primarily the result of increased demand from our only wastewater
customer. Wastewater operating costs and gross margin fluctuate
based on timing of expenses and regulatory requirements, but
generally fluctuate consistent with demand.
Tap and Special Facility Revenues – We have various water and wastewater service
agreements, a component of which may include tap fees and
construction fees. We recognize water tap fees from wholesale users
as revenue ratably over the estimated service period upon
completion of the “Wholesale Facilities” (defined in
the 2016 Annual Report) constructed to provide service to Arapahoe
County, Colorado (the “County”). We recognized $3,600
and $7,200 of water tap fee revenues during each of the three and
six months ended February 28, 2017 and February 29, 2016,
respectively. The water tap fees to be recognized over these
periods are net of the royalty payments to the Land Board and
amounts paid to third parties pursuant to the “CAA,”
which is described in Note 4 – Long-Term Obligations and
Operating Lease to the
accompanying consolidated financial statements.
We recognized $10,400 and $27,800 of “Special
Facilities” (defined in the 2016 Annual Report) funding as
revenue during each of the three months ended February 28, 2017 and
February 29, 2016, respectively. This is the ratable portion of the
Special Facilities funding proceeds received from the County
pursuant to a water service agreement as more fully described in
Note 2 – Summary of Significant
Accounting Policies to
Part II, Item 8 of the 2016 Annual
Report.
At February 28, 2017, we had deferred recognition of $1.0 million
of wholesale water tap and construction fee revenue from the
County, which will be recognized as revenue ratably over the
estimated useful accounting life of the assets constructed with the
construction proceeds as described above.
Rangeview’s water tap fees are $24,620 per SFE, and
wastewater tap fees are $4,988 per SFE. We did not sell any water
or wastewater taps during the three or six months ended February
28, 2017 or February 29, 2016.
Other Income – Other
income consisted principally of consulting fees of $21,200 and
$24,400 for the three months ended February 28, 2017 and February
29, 2016, respectively. Other income consisted principally of
consulting fees of $53,000 and $57,700 for the six months ended
February 28, 2017 and February 29, 2016, respectively. Our margins
have fluctuated as we allocated additional staff costs to system
management. Other income also included $11,200 for the six months
ended February 29, 2016, from a cost-sharing arrangement for our
industrial water sales to the fracking
industry.
General and Administrative Expenses
Significant balances classified as general and administrative
("G&A") expenses for the three and six months ended February
28, 2017 and February 29, 2016, respectively, were:
Table 3a - Signficant Balances in G&A
|
|
|
|
|
|
|
|
|
Salary
and salary related expenses:
|
|
|
|
|
Including share-based compensation
|
$274,500
|
$232,700
|
$41,800
|
18%
|
Excluding share-based compensation
|
$212,800
|
$177,500
|
$35,300
|
20%
|
Professional
fees
|
$56,164
|
$69,600
|
$(13,436)
|
-19%
|
Fees
paid to directors (including insurance)
|
$29,426
|
$33,700
|
$(4,274)
|
-13%
|
Public
entity related expenses
|
$21,400
|
$24,000
|
$(2,600)
|
-11%
|
Table 3b - Signficant Balances in G&A
|
|
|
|
|
|
|
|
|
Salary
and salary related expenses:
|
|
|
|
|
Including share-based compensation
|
$507,000
|
$458,900
|
$48,100
|
10%
|
Excluding share-based compensation
|
$402,500
|
$350,000
|
$52,500
|
15%
|
Professional
fees
|
$118,500
|
$153,000
|
$(34,500)
|
-23%
|
Fees
paid to directors (including insurance)
|
$63,700
|
$63,700
|
$-
|
0%
|
Public
entity related expenses
|
$49,700
|
$55,600
|
$(5,900)
|
-11%
|
Salary and salary related expenses – Salary and salary related expenses including
share-based compensation increased 18% and 10% for the three and
six months ended February 28, 2017, as compared to the three and
six months ended February 29, 2016, respectively. The increase was
primarily the result of increases in salaries, which was partially
offset by a reduction in share-based compensation expenses. The
salary and salary related expenses noted above include $61,700 and
$55,200 of share-based compensation expenses during the three
months ended February 28, 2017 and February 29, 2016, respectively.
The salary and salary related expenses noted above include $104,500
and $108,900 of share-based compensation expenses during the six
months ended February 28, 2017 and February 29, 2016,
respectively.
Professional fees (mainly accounting and legal) –
Legal and accounting fees decreased
19% and 23% during the three and six months ended February 28,
2017, as compared to the three and six months ended February 29,
2016, respectively. The decrease was due to decreased legal fees
related to litigation of approximately $23,500 and $46,300 for the
three and six months ended February 28, 2017, as compared to the
three and six months ended February 28, 2017 and February 29, 2016,
respectively.
Fees paid to directors (including insurance) – Directors' fees, including D&O insurance,
decreased 13% and were consistent for the three and six months
ended February 28, 2017, as compared to the three and six months
ended February 29, 2016, respectively. These fees vary due to the
number of meetings and timing of payments, however they are
generally expected to remain consistent year over
year.
Public entity expenses – Costs associated with corporate governance and
costs associated with being a publicly traded entity decreased 11%
for each of the three and six months ended February 28, 2017 as
compared to the three and six months ended February 29, 2016. The
fluctuations are due to the timing and number of filings and
compliance costs for filing with the Securities and Exchange
Commission (the “SEC”).
Other Income and Expense Items
|
|
|
|
|
|
|
|
|
|
Other
income items:
|
|
|
|
|
Oil and gas lease income, net
|
$6,000
|
$161,400
|
$(155,400)
|
-96%
|
Oil and gas royalty income, net
|
$71,300
|
$72,500
|
$(1,200)
|
-2%
|
Interest income
|
$66,100
|
$77,600
|
$(11,500)
|
-15%
|
|
|
|
|
|
|
|
|
|
|
Other
income items:
|
|
|
|
|
Oil and gas lease income, net
|
$11,200
|
$322,900
|
$(311,700)
|
-97%
|
Oil and gas royalty income, net
|
$139,400
|
$194,600
|
$(55,200)
|
-28%
|
Interest income
|
$139,700
|
$141,400
|
$(1,700)
|
-1%
|
The oil
and gas lease income amounts in 2016 primarily represent a portion
of the up-front payments we received on March 10, 2011, upon the
signing of a Paid-Up Oil and Gas Lease that was subsequently
purchased by a wholly-owned subsidiary of ConocoPhillips Company
(the "O&G Lease") and a Surface Use and Damage Agreement (the
"Surface Use Agreement"). During fiscal year 2011, we received
payments of $1,243,400 for the purpose of exploring for,
developing, producing and marketing oil and gas on 634 acres of
mineral estate we own at our Sky Ranch property. The income
received was recognized in income ratably over the initial
three-year term of the O&G Lease, which began on March 10,
2011. During February 2014, we received an additional payment of
$1,243,400 to extend the initial term of the O&G Lease by an
additional two years through February 2016. The income received for
the extension was recognized in income over the two-year extension
term of the O&G Lease. The oil and gas lease income amounts in
2017 and a small portion of 2016 represent a portion of the
up-front payment of $72,000 we received in fiscal 2014 for
exploring for, developing, producing, and marketing oil and gas on
40 acres of mineral estate we own adjacent to the Lowry Range (the
"Rangeview Lease"). The income received for the Rangeview Lease is
being recognized ratably through June 2017.
The oil
and gas royalty income represents amounts received pursuant to the
O&G Lease. The amount includes royalties from oil and gas
production from wells in our mineral estate at Sky Ranch. The
royalties for the three months ended February 28, 2017 were
approximately $71,300, as compared to $72,500 for the same period
in 2016. The royalties for the six months ended February 28, 2017
were approximately $139,400, as compared to $194,600 for the same
period in 2016. The decrease in oil and gas royalties is a result
of lower production of oil and gas from wells in our mineral estate
at Sky Ranch.
Interest
income represents interest earned on the temporary investment of
capital in cash and cash equivalents, available-for-sale
securities, finance charges, and interest accrued on the notes
receivable from Rangeview and Sky Ranch Metropolitan District
No. 5. The increase was primarily attributable to the
investment of cash received from the sale of our farms in August
2015 in a money market fund at a bank, certificates of deposit, and
investments in U.S. treasury securities.
Discontinued Operations
For additional information about our discontinued operations, see
Notes to Consolidated Financial Statements.
The following table provides the components of discontinued
operations:
Discontinued Operations Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farm
revenues
|
$6,034
|
$63,743
|
$6,034
|
$275,991
|
Farm
expenses
|
-
|
(17,736)
|
-
|
(33,368)
|
Gross profit
|
6,034
|
46,007
|
6,034
|
242,623
|
|
|
|
|
|
General
and administrative expenses
|
17,104
|
74,648
|
36,730
|
213,156
|
Operating (loss) profit
|
(11,070)
|
(28,641)
|
(30,696)
|
29,467
|
Finance
charges
|
8,421
|
-
|
9,367
|
-
|
Income (loss) from discontinued operations
|
$(2,649)
|
$(28,641)
|
$(21,329)
|
$29,467
|
Liquidity, Capital Resources and Financial Position
At February 28, 2017, our working capital, defined as current
assets less current liabilities, was $27.8 million, which included
$28.1 million in cash and cash equivalents and available for sale
securities, and we had $1.4 million held in long-term
investments.
We believe that as of February 28, 2017 and as of the date of the
filing of this Quarterly Report on Form 10-Q, we have sufficient
working capital to fund our operations for the next fiscal
year.
Sale of Farm Assets – We
sold our Arkansas River farm assets for approximately $45.8 million
on August 18, 2015. Approximately $1.3 million was being held in
escrow pending the resolution of dry-up covenant issues related to
three farms. During the fiscal quarter ended February 29, 2016, we
received the $1.3 million.
System Expansion – During
the six months ended February 28, 2016, we spent approximately $4.0
million to install approximately eight miles of pipeline and other
infrastructure at our Sky Ranch water system and infrastructure at
Rangeview. We anticipate the pipeline will be completed in April
2017.
ECCV Capacity Operating System – Rangeview has the right to purchase water from
East Cherry Creek Valley Water and Sanitation Districts’s
(“ECCV”) Land Board system. In May 2012, in order to
increase the delivery capacity and reliability of the ECCV wells,
in our capacity as Rangeview’s service provider and the
Export Water Contractor (as defined in the 2014 Amended and
Restated Lease Agreement among us, Rangeview and the Land Board),
we entered into an agreement to operate and maintain certain ECCV
facilities located on the Lowry Range, allowing us to utilize the
system to provide water to commercial and industrial customers,
including customers providing water for drilling and hydraulic
fracturing of oil and gas wells. Our costs associated with the use
of the ECCV system are a flat monthly fee of $8,000 per month from
January 1, 2013 through December 31, 2020, and will decrease to
$3,000 per month from January 1, 2021 through April 2032.
Additionally, we pay a fee per 1,000 gallons of water produced from
ECCV’s system, which is included in the water usage fees
charged to customers. In addition, the ECCV system costs us
approximately $500 per month to maintain.
South Metropolitan Water Supply Authority (“SMWSA”) and
the Water Infrastructure Supply Efficiency Partnership
(“WISE”) – SMWSA is a municipal water authority in the State
of Colorado organized to pursue the acquisition and development of
new water supplies on behalf of its members, including Rangeview.
Pursuant to the SMWSA Participation Agreement with Rangeview, we
agreed to provide funding to Rangeview in connection with its
membership in the SMWSA. In July 2013, Rangeview, together with
nine other SMWSA members, formed an entity to enable its members to
participle in a cooperative water project known as WISE and entered
into an agreement that specifies each member’s pro rata share
of WISE and the members’ rights and obligations with respect
to WISE. On December 31, 2013, the South Metro WISE Authority
(“SMWA”), the City and County of Denver acting through
its Board of Water Commissioners (“Denver Water”) and
the City of Aurora acting by and through its Utility Enterprise
(“Aurora Water”) entered into the Amended and Restated
WISE Partnership – Water Delivery Agreement (the
“WISE Partnership Agreement”), which provides for the
purchase of certain infrastructure (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. We have entered into the
Rangeview/Pure Cycle WISE Project Financing Agreement (the
“WISE Financing Agreement”), which obligates us to fund
Rangeview’s cost of participating in WISE. We anticipate that
we will be investing approximately $5.6 million during the next
five fiscal years to fund Rangeview’s purchase of its share
of the water transmission line and additional facilities, water and
related assets for WISE. In exchange for funding Rangeview’s
obligations in WISE, we will have the sole right to use and reuse
Rangeview’s 7% share of the WISE water and infrastructure to
provide water service to Rangeview’s customers and to receive
the revenue from such service. Upon completion in 2021, we expect
to be entitled to approximately three million gallons per day of
transmission pipeline capacity and 500 acre feet per year of
water.
Summary Cash Flows Table
Table 5 - Summary Cash Flows Table
|
|
|
|
|
|
|
|
|
Cash
(used in) provided by:
|
|
|
|
|
Operating acitivites
|
$(536,300)
|
$(225,200)
|
$(311,100)
|
138%
|
Investing activities
|
$2,592,400
|
$(30,681,000)
|
$33,273,400
|
-108%
|
Financing activities
|
$(1,900)
|
$(1,500)
|
$(400)
|
27%
|
Changes in
Operating Activities – Operating activities include revenues we receive
from the sale of wholesale water and wastewater services and from
leases on our farms, costs incurred in the delivery of those
services, G&A expenses, and depletion/depreciation
expenses.
Cash used in operations in the six months ended February 28, 2017,
increased by $311,100 compared to the six months ended February 29,
2016, which was due primarily to a decrease in deferred oil and gas
lease payments of approximately $310,900 as well a decrease in
income taxes of approximately $292,700.
Changes in Investing Activities – Investing activities in the six months ended
February 28, 2017, consisted of the sale of available for sale
securities for $7.2 million, the investment in our water system of
$4.6 million of which approximately $2.9 million (of the total
estimated $4.2 million cost) related to construction of the Sky
Ranch pipeline, $1.6 million related to the Wild Pointe purchase
and approximately $0.1 million related to the WISE infrastructure,
and the purchase of equipment of $29,500. Investing activities in
the six months ended February 29, 2016, consisted of the sale of
$19.9 million and purchase of $10.0 million of available for sale
securities, the investment in our water system of $270,100 and the
purchase of equipment of $412,000.
Changes in Financing Activities – Financing activities in the six months ended
February 28, 2017, consisted of payments to contingent liability
holders of $1,900. Financing activities in the six months ended
February 29, 2016, consisted of payments to contingent liability
holders of $1,500.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the
contingent portion of the CAA as described in
Note 4 – Long-Term Obligations and
Operating Lease – Participating Interests in Export Water
Supply to the accompanying
financial statements. The contingent liability is not reflected on
our balance sheet because the obligation to pay the CAA is
contingent on sales of “Export Water” (defined in
Note 4 – Water and Land Assets
in Part II, Item 8 of the 2016
Annual Report), the amounts and timing of which are not reasonably
determinable.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions about
future events that affect the amounts reported in the financial
statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and
such differences may be material to the financial
statements.
The most significant accounting estimates inherent in the
preparation of our financial statements include estimates
associated with the timing of revenue recognition, the impairment
of water assets and other long-lived assets, fair value estimates
and share-based compensation. Below is a summary of these critical
accounting policies.
Revenue Recognition
Our revenues consist mainly of monthly service fees, tap fees, and
construction fees. Additionally, we receive other income from oil
and gas leases and related royalties on our properties. Monthly
metered water usage fees and monthly wastewater treatment fees are
recognized in income each month as earned.
As further described in Note 1 –
Presentation of
Interim Information to the
accompanying financial statements, proceeds from tap sales and
construction fees are deferred upon receipt and recognized in
income based on whether we own the facilities constructed with the
proceeds. We recognize tap fees derived from agreements for which
we construct infrastructure owned by others as revenue, along with
the associated costs of construction, pursuant to the
percentage-of-completion method. The percentage-of-completion
method requires management to estimate the percent of work that is
completed on a particular project, which could change materially
during the construction period and result in significant
fluctuations in revenue recognized during the reporting periods
throughout the construction process. We did not recognize any
revenues pursuant to the percentage-of-completion method during the
three and six months ended February 28, 2017 or February 29,
2016.
Tap and construction fees derived from agreements for which we own
the infrastructure are recognized as revenue ratably over the
estimated service life of the assets constructed with such fees.
Although the cash will be received up-front and most construction
will be completed within one year of receipt of the proceeds,
revenue recognition may occur over 30 years or more. Management is
required to estimate the service life, and currently the service
life is based on the estimated useful accounting life of the assets
constructed with the tap fees. The useful accounting life of the
asset is based on management’s estimation and may not have
any correlation to the actual life of the asset or the actual
service life of the tap. The accounting-based useful life is deemed
a reasonable recognition life of the revenues because the
depreciation of the assets constructed generating those revenues
will therefore be matched with the revenues.
On March 10, 2011, we entered into the O&G Lease. Pursuant to
the O&G Lease, during each of the fiscal years ended August 31,
2011 and 2014, we received up-front payments of $1,243,400 for the
purpose of exploring for, developing, producing and marketing oil
and gas on approximately 634 acres of mineral estate we own at our
Sky Ranch property. We recognized or are recognizing the up-front
payments from the O&G Lease as income on a straight-line basis
over three years (the initial term of the O&G Lease) and over
two years (the extended term of the O&G Lease). Puresuant to
the Rangeview Lease, during the fiscal year ended August 31, 2015,
we received an up-front payment of $72,000 for the purpose of
exploring for, developing, producing and marketing oil and gas on
40 acres of mineral estate we own adjacent to the Lowry Range. In
connection with the up-front payments received pursuant to the
O&G Lease and the Rangeview Lease, we recognized oil and gas
lease income of (i) $6,000 and $161,400 during the three months
ended February 28, 2017 and February 29, 2016, respectively, and
(ii) $11,300 and $322,900 for the six months ended February 28,
2017 and February 29, 2016, respectively.
During
the three months ended February 28, 2015, two wells were drilled
within our mineral interest. Beginning in March 2015, both wells
were placed into service and began producing oil and gas and
accruing royalties to us. In May 2015, certain gas collection
infrastructure was extended to the property to allow the collection
of gas from the wells and accrual of royalties attributable to gas
production. We received royalties attributable to these wells of
(i) $71,300 and $72,500 during the three months ended February 28,
2017 and February 29, 2016, respectively, and (ii) $139,400 and
$194,600 for the six months ended February 28, 2017 and February
29, 2016, respectively.
Prior to discontinuing our farm operations, we leased our farms to
local area farmers on both a cash and crop share lease basis. Our
cash lease farmers were charged a fixed fee, which was billed
semi-annually in March and November. During the November billing
cycle, our cash lease billings included either a discount or a
premium adjustment based on actual water deliveries by the FLCC.
Our crop share lease fees were based on actual crop yields and were
received upon the sale of the crops. All fees were estimated and
recognized ratably on a monthly basis. We sold our farms in August
2015; however, pursuant to the purchase and sale agreement, we
continued to receive lease income through December 31,
2015.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment whenever management
believes events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We measure
recoverability of assets to be held and used by a comparison of the
carrying amount of an asset to estimated future undiscounted net
cash flows we expect to be generated by the eventual use of the
asset. If such assets are considered to be impaired and therefore
the costs of the assets deemed to be unrecoverable, the impairment
to be recognized would be the amount by which the carrying amount
of the assets exceeds the estimated fair value of the
assets.
Our water assets will be utilized in the provision of water
services that inevitably will encompass many housing and economic
cycles. Our service capacities are quantitatively estimated based
on an average single family home utilizing .4 acre feet of water
per year. Average water deliveries are approximately .4 acre feet;
however, approximately 50% or .2 acre feet are returned and
available for reuse. Our water supplies are legally decreed to us
through the water court. The water court decree allocates a
specific amount of water (subject to continued beneficial use),
which historically has not changed. Thus, individual housing and
economic cycles typically do not have an impact on the number of
connections we can serve with our supplies or the amount of water
legally decreed to us relating to these supplies.
We report assets to be disposed of at the lower of the carrying
amount or fair value less costs to sell. See further discussion
regarding our land held for sale in Note 4 –
Water and Land
Assets to Part II,
Item 8 of our 2016 Annual Report.
Our Front Range Water Rights – We determine the undiscounted cash flows for our
Denver-based assets by estimating tap sales to potential new
developments in our service area and along the Front Range, using
estimated future tap fees less estimated costs to provide water
services, over an estimated development period. Actual new home
development in our service area and the Front Range, actual future
tap fees, and actual future operating costs inevitably will vary
significantly from our estimates, which could have a material
impact on our financial statements as well as our results of
operations. We performed an impairment analysis as of August 31,
2016, and determined that there were no material changes and our
Denver-based assets are not impaired and their costs are deemed
recoverable. Our impairment analysis is based on development
occurring within areas in which we have service agreements (e.g.,
Sky Ranch and the Lowry Range) as well as in surrounding areas,
including the Front Range and the I-70 corridor. Our combined
Rangeview Water Supply and Sky Ranch water assets have a carrying
value of $27.6 million as of February 29, 2016. Based on the
carrying value of our water rights, the long-term and uncertain
nature of any development plans, current tap fees of $24,620 and
estimated gross margins, we estimate that we would need to add
2,300 new water connections (requiring 3.5% of our portfolio) to
generate net revenues sufficient to recover the costs of our
Rangeview Water Supply assets. If tap fees increase 5%, we would
need to add 2,100 new water taps (requiring 3.4% of our portfolio)
to recover the costs of our Rangeview Water Supply assets. If tap
fees decrease 5%, we would need to add 2,400 new water taps
(requiring 3.7% of our portfolio) to recover the costs of our
Rangeview Water Supply assets.
Although changes in the housing market throughout the Front Range
have delayed our estimated tap sale projections, these changes do
not alter our water ownership, our service obligations to existing
properties or the number of SFEs we can service.
Share-Based Compensation
We estimate the fair value of share-based payment awards made to
key employees and directors on the date of grant using the
Black-Scholes option pricing model. We then expense the fair value
over the vesting period of the grant using a straight-line expense
model. The fair value of share-based payments requires management
to estimate or calculate various inputs such as the volatility of
the underlying stock, the expected dividend rate, the estimated
forfeiture rate and an estimated life of each option. We do not
expect any forfeiture of option grants; therefore, the compensation
expense has not been reduced for estimated forfeitures. These
assumptions are based on historical trends and estimated future
actions of option holders and may not be indicative of actual
events, which may have a material impact on our financial
statements. For further details on share-based compensation
expense, see Note 5 – Shareholders’
Equity to the accompanying
financial statements.
Recently Adopted and Issued Accounting Pronouncements
See Note 1 – Presentation of Interim
Information to the accompanying
financial statements for recently adopted and issued accounting
pronouncements.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained in or
incorporated by reference into this Quarterly Report on Form 10-Q
are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Forward-looking statements
involve risks and uncertainties that could cause actual results to
differ from projected results. The words “anticipate,”
“goal,” “seek,” “project,”
“strategy,” “future,” “likely,”
“may,” “should,” “will,”
“believe,” “estimate,”
“expect,” “plan,” “intend” and
similar expressions and references to future periods, as they
relate to us, are intended to identify forward-looking statements.
Forward-looking statements reflect our current views with respect
to future events and are subject to certain risks, uncertainties
and assumptions. We cannot assure you that any of our expectations
will be realized. Forward-looking statements include, among others,
statements we make regarding:
●
material
changes to unrecognized tax positions;
●
the
impact of new accounting pronouncements;