2
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY
Three months ended November 30, 20152016
(Unaudited)(unaudited)
| | | | | | | | Additional | | | | | | | | | | |
| | Preferred Stock | | | Common Stock | | | Paid-in | | | Collateral | | | Accumulated | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Stock | | | Deficit | | | Total | |
August 31, 2015 balance: | | | 432,513 | | | $ | 433 | | | | 24,054,098 | | | $ | 80,185 | | | $ | 172,384,355 | | | $ | (1,407,000 | ) | | $ | (100,972,425 | ) | | $ | 70,085,548 | |
Share-based compensation | | | – | | | | – | | | | – | | | | – | | | | 53,690 | | | | – | | | | – | | | | 53,690 | |
Collateral stock retired | | | – | | | | – | | | | (300,000 | ) | | | (1,000 | ) | | | (1,406,000 | ) | | | 1,407,000 | | | | – | | | | - | |
Net loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (97,541 | ) | | | (97,541 | ) |
November 30, 2015 balance: | | | 432,513 | | | $ | 433 | | | | 23,754,098 | | | $ | 79,185 | | | $ | 171,032,045 | | | $ | - | | | $ | (101,069,966 | ) | | $ | 70,041,697 | |
| | | | | | Accumulated | | |
| | | | | | | | |
| | | | | | |
| | | | | | | | |
August 31, 2016 balance: | 432,513 | $433 | 23,754,098 | $79,185 | $171,198,241 | $3,122 | $(102,283,032) | $68,997,949 |
Share-based compensation | – | – | – | – | 42,795 | – | – | 42,795 |
Net loss | – | – | – | – | – | – | (337,972) | (337,972) |
Unrealized holding loss on investments | – | – | – | – | – | (22,211) | – | (22,211) |
November 30, 2016 balance: | 432,513 | $433 | 23,754,098 | $79,185 | $171,241,036 | $(19,089) | $(102,621,004) | $68,680,561 |
See accompanying Notes to Consolidated Financial Statements
3
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Three Months Ended November 30, | | Three Months Ended November 30, |
| | 2015 | | | 2014 | | | |
Cash flows from operating activities: | | | | | | | |
Net (loss) income | | $ | (97,541 | ) | | $ | 10,308 | | |
Adjustments to reconcile net income (loss) to net cash | | | | | | | | | |
used for operating activities: | | | | | | | | | |
Imputed interest on Tap Participation Fee payable to HP A&M | | | - | | | | 23,816 | | |
Net loss | | $(337,972) | $(97,541) |
Adjustments to reconcile net loss to net cash | | |
used in operating activities: | | |
Depreciation and depletion | | | 94,571 | | | | 78,865 | | 115,668 | 94,571 |
Investment in Well Enhancement Recover Systems, LLC | | | 2,663 | | | | (3,871 | ) | |
Investment in Well Enhancement Recovery Systems, LLC | | 2,612 | 2,633 |
Stock-based compensation expense | | | 53,690 | | | | 68,825 | | 42,795 | 53,690 |
Interest income and other non-cash items | | | (105 | ) | | | (104 | ) | (22,316) | (105) |
Interest added to receivable from Rangeview Metropolitan District | | | (3,226 | ) | | | (3,002 | ) | |
Interest added to receivable from related parties | | (12,476) | (3,226) |
Changes in operating assets and liabilities: | | | | | | | | | |
Trade accounts receivable | | | (157,508 | ) | | | 680,986 | | (18,401) | (51,332) |
Sky Ranch receivable | | | - | | | | (1,500 | ) | |
Prepaid expenses | | | 91,388 | | | | 52,732 | | (28,354) | 60,860 |
Receivable from HP A&M | | | - | | | | (44,880 | ) | |
Note receivable - related party: Rangeview Metropolitian District | | | - | | | | (25,000 | ) | |
Notes receivable - related parties | | (4,999) | - |
Accounts payable and accrued liabilities | | | (447,964 | ) | | | (1,001,656 | ) | (9,723) | (470,230) |
Income taxes | | | (292,729 | ) | | | - | | - | (292,729) |
Interest accrued on agriculture land promissory notes | | | - | | | | (20,058 | ) | |
Deferred revenues | | | 57,730 | | | | 68,141 | | (13,951) |
Deferred oil and gas lease payment | | | (161,430 | ) | | | (161,430 | ) | (6,000) | (161,430) |
Net cash provided by (used in) operating activities from continuing operations | | (293,117) | (878,790) |
Net cash provided by (used in) operating activities from discontinued operations | | 34,581 | 18,299 |
Net cash used in operating activities | | | (860,461 | ) | | | (277,828 | ) | (258,536) | (860,491) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Sale of short-term investments | | 1,424,473 | - |
Investments in water, water systems, and land | | | (25,168 | ) | | | (1,154,253 | ) | (265,371) | (25,168) |
Purchase of farm land | | | (443,620 | ) | | | - | | |
Purchase of property and equipment | | | (248,866 | ) | | | - | | (15,342) | (248,866) |
Proceeds from sale of farm land | | | - | | | | 699,826 | | |
Net cash used in investing activities | | | (717,654 | ) | | | (454,427 | ) | |
Net cash provided by (used in) investing activities from continuing operations | | 1,143,760 | (274,034) |
Net cash used in investing activities from discontinued operations | | - | (443,620) |
Net cash provided by (used in) investing activities | | 1,143,760 | (717,654) |
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Payments to contingent liability holders | | | (492 | ) | | | (6,409 | ) | (1,543) | (492) |
Proceeds from borrowings on promissory notes payable | | | - | | | | 2,311,656 | | |
Payments made on promissory notes payable | | | - | | | | (1,395,009 | ) | |
Net cash used in financing activities from continuing operations | | (1,543) | (492) |
Net cash provided by financing activities from discontinued operations | | - |
Net cash (used in) provided by financing activities | | | (492 | ) | | | 910,238 | | (1,543) | (492) |
Net change in cash and cash equivalents | | | (1,578,607 | ) | | | 177,983 | | 883,681 | (1,578,637) |
Cash and cash equivalents – beginning of period | | | 37,089,041 | | | | 1,749,558 | | 4,697,288 | 37,089,041 |
Cash and cash equivalents – end of period | | $ | 35,510,434 | | | $ | 1,927,541 | | $5,580,969 | $35,510,404 |
| | | | | | | | | |
| | | | | | | | | |
| | |
SUPPLEMENTAL DISCLSOURES OF NON-CASH ACTIVITIES | | | | | | | | | |
Retirement of Collateral Stock | | $ | 1,407,000 | | | $ | - | | |
Reduction in Tap Participation Fee liability resulting from remedies under | | | | | | | | | |
the Arkansas River Agreement | | $ | - | | | $ | 6,227,266 | | |
Retirement of collateral stock | | $- | $1,407,000 |
See accompanying Notes to Consolidated Financial Statements
4
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 20152016
NOTE 1 - PRESENTATION OF INTERIM INFORMATION
The November 30, 2015 consolidated balance sheet, the consolidated statements of operations for the three months ended November 30, 2015 and 2014, respectively, the consolidated statement of shareholders' equity for the three months ended November 30, 2015, and the consolidated statements of cash flows for the three months ended November 30, 2015 and 2014, respectively, have been prepared by Pure Cycle Corporation (the "Company") and have not been audited. The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at November 30, 2015, 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 2015 Annual Report on Form 10-K (the "2015 Annual Report") filed with the Securities and Exchange Commission (the "SEC") on November 9, 2015. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full fiscal year. The August 31, 2015 balance sheet was taken from the Company's audited financial statements.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company's cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution. At various times during the three months ended November 30, 2015, the Company's main operating account exceeded federally insured limits.
Financial Instruments – Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with reputable financial institutions. The Company has historically invested its idle cash primarily in certificates of deposit, money market instruments, commercial paper obligations, corporate bonds and U.S. government treasury obligations. To date, the Company has not experienced significant losses on any of these investments.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.
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.
Accounts Payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.
Long-Term Financial Liabilities – The Comprehensive Amendment Agreement No. 1 (the "CAA") is comprised of a recorded balance and an off-balance sheet or "contingent" obligation associated with the Company's acquisition of its "Rangeview Water Supply" (defined in Note 4 – Water and Land Assets to the 2015 Annual Report). The amount payable is a fixed amount but is repayable only upon the sale of "Export Water" (defined in Note 4 – Water and Land Assets to the 2015 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. The CAA is described further in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.
Note Receivable – Related Party – The market value of the note receivable – related party: Rangeview Metropolitan District (the "District") is not practical to estimate due to the related party nature of the underlying transaction.
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 water revenues recognized by the Company are shown gross of royalties to the State of Colorado Board of Land Commissioners (the "Land Board") and, when applicable, amounts retained by the District. The Company recognized $56,800 and $491,800 of metered water usage revenues during the three months ended November 30, 2015 and 2014, respectively.
The Company recognizes wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts retained by the District. The Company recognized $10,300 and $11,700 of wastewater treatment fees during the three months ended November 30, 2015 and 2014, respectively. Costs of delivering water and providing wastewater services to customers are recognized as incurred.
Tap and Construction Fees – The Company has various water and wastewater service agreements, a component of which may include tap and construction fees. The Company recognizes water tap fees as revenue ratably over the estimated service period upon completion of the "Wholesale Facilities" (defined in Part I, Item 1 of the 2015 Annual Report) constructed to provide service to Arapahoe County, Colorado (the "County"). The Company recognized $3,600 of water tap fee revenues during each of the three months ended November 30, 2015 and 2014. 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 of "Special Facilities" (defined in Part I, Item 1 of the 2015 Annual Report) funding as revenue during each of the three months ended November 30, 2015 and 2014. This is the ratable portion of the Special Facilities funding proceeds received from water agreements as more fully described in Note 2 – Summary of Significant Accounting Policies to the 2015 Annual Report.
As of November 30, 2015, and August 31, 2015, the Company has deferred recognition of approximately $1,153,100 and $1,167,300, respectively, of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.
Agriculture Farming Operations – Prior to the sale of its Arkansas River water and land, the Company leased its Arkansas River water and land to area farmers who actively farmed the properties. Pursuant to the terms of the purchase and sale agreement, the Company will continue to manage and receive the lease income until December 31, 2015. Therefore, the farm revenues and expenses are presented within operations for the three months ended November 30, 2015 and 2014, respectively. Pursuant to the farm lease agreements, the Company bills the lessees semi-annually in March and November. The lease billings include minimum billings and adjustments based on actual water deliveries by the Fort Lyon Canal Company ("FLCC") or are based on crop yields. The Company records farm lease income ratably each month based on estimated annual lease income the Company anticipates collecting from its land and water leases. The Company recorded these amounts as receivables, less an estimated allowance for uncollectible accounts. The allowance as of August 31, 2015, was determined by the Company's specific review of all past due accounts. The Company has recorded allowances for doubtful accounts totaling $26,300 for each of the periods ended November 30, 2015 and August 31, 2015. As of November 30, 2015 and August 31, 2015, the Company has accrued deferred revenue of $72,600 and $900, respectively, of farm income related to billings for future periods. As of November 30, 2015 and August 31, 2015, the Company has accrued a receivable of $127,300 and $361,400, respectively, of farm income related to future billings and estimates of revenue the Company anticipates receiving from crop share leases.The Company manages the farm lease business as a separate line of business from the wholesale water and wastewater business.
Royalty and Other Obligations
Revenues from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the sale of water on the "Lowry Range" (described in Note 4 – Water and Land Assets in Part II, Item 8 of the 2015 Annual Report) are shown net of the royalties to the Land Board and the amounts retained by the District.
Oil and Gas Lease Payments
As further described in Note 2 – Summary of Significant Accounting Policies in Part II, Item 8 of the 2015 Annual Report, on March 10, 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") with Anadarko E&P Company, L.P. ("Anadarko"), a wholly owned subsidiary of Anadarko Petroleum Company. In December 2012, the O&G Lease was purchased by a wholly owned subsidiary of ConocoPhillips Company. Pursuant to the O&G Lease, during the year ended August 31, 2011, the Company received an up-front payment of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate owned by the Company at its "Sky Ranch" property (described in Note 4 – Water and Land Assets to the 2015 Annual Report). The Company began recognizing the up-front payments as income on a straight-line basis over three years (the initial term of the O&G Lease) on March 10, 2011. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which will be 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"). During each of the three months ended November 30, 2015 and 2014, the Company recognized $161,400 of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease.
As of November 30, 2015 and August 31, 2015, the Company has deferred recognition of $218,300 and $379,800, respectively, of income related to the O&G Lease and the Rangeview Lease, which will be recognized into income ratably through February 2016 and July 2017, respectively.
During the three months ended February 28, 2015, two wells were drilled within the Company's mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to the Company. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. During the three months ended November 30, 2015, the Company received $122,100 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 $53,700 and $68,800 of share-based compensation expense during the three months ended November 30, 2015 and 2014, respectively.
Income Taxes
The Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of November 30, 2015.
The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal year 2013 through fiscal year 2015. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At November 30, 2015, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended November 30, 2015 or 2014.
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 312,100 and 315,100 common share equivalents were outstanding as of November 30, 2015 and 2014, 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. During the current period, there were no new accounting pronouncements issued that will significantly impact the Company's financial reporting.
NOTE 21 – FAIR VALUE MEASUREMENTSPRESENTATION OF INTERIM INFORMATION
Fair value is defined asThe November 30, 2016 consolidated balance sheet, the priceconsolidated statements of operations and comprehensive income (loss) for the three months ended November 30, 2016 and 2015, the consolidated statement of shareholders’ equity for the three months ended November 30, 2016, and the consolidated statements of cash flows for the three months ended November 30, 2016 and 2015 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. The unaudited consolidated financial statements include all adjustments that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement dateare, in the principalopinion of management, necessary to present fairly the financial position, results of operations and cash flows at November 30, 2016, and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or most advantageous market.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 Company uses a fair value hierarchy that has three levelsresults of inputs, both observable and unobservable, with useoperations for interim periods presented are not necessarily indicative of the lowest possible leveloperating results for the full fiscal year. The August 31, 2016 balance sheet was derived from the Company’s audited consolidated financial statements.
Use of inputEstimates
The preparation of consolidated financial statements in accordance with GAAP requires management to determine fair value.
Level 1 — Valuations formake estimates and assumptions that affect the reported amounts of assets and liabilities traded in active exchange markets, such asand disclosure of contingent assets and liabilities at the NASDAQ Stock Market.date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution. At various times during the three months ended November 30, 2016, the Company’s main operating account exceeded federally insured limits. The Company had onehas never suffered a loss due to such excess balance.
Investments
Management determines the appropriate classification of its investments in certificates of deposit and debt and equity securities at the time of purchase and re-evaluates such determinations each reporting period.
Certificates of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company has $6,846,600 of investments classified as held-to-maturity at November 30, 2016, which represent certificates of deposit and U.S. treasury notes with maturity dates after November 30, 2017. Certificates of deposit and debt securities that the Company does not have the positive intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value on such securities are recorded as a component ofAccumulated other comprehensive income (loss).The cost of securities sold is based on the specific identification method. The Company’s certificates of deposit and debt securities mature at various dates through February 28, 2018.
Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, certificates of deposit and U.S. government treasury obligations. To date, the Company has not experienced significant losses on any of these instruments asinvestments.
The following methods and assumptions were used to estimate the fair value of November 30, 2015 and August 31, 2015.each class of financial instrument for which it is practicable to estimate that value.
8
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Cash and Cash Equivalents –The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value.
Trade Accounts Receivable –The Company records accounts receivable net of allowances for uncollectible accounts.
Investments –The carrying amounts of investments approximate fair value. Investments are described further in Note 2 –Fair Value Measurements.
Accounts Payable –The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.
Long-Term Financial Liabilities–The Comprehensive Amendment Agreement No. 1 (the “CAA”) is comprised of a recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (defined in Note 4 –Water and Land Assetsto 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 Assetsto the 2016 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. The CAA is described further in Note 4 –Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.
Notes Receivable – Related Parties–The fair value of the notes receivable – related parties from Rangeview Metropolitan District (the “District”) and Sky Ranch Metropolitan District No. 5 are not practical to estimate due to the related party nature of the underlying transactions.
Off-Balance Sheet Instruments –The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. See further discussion in Note 4 –Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.
Revenue Recognition
Wholesale Water and Wastewater Fees – Monthly wholesale water usage charges are assessed to the Company’s customers based on actual metered usage each month plus a base monthly service fee. The Company recognizes wholesale water usage revenues upon delivering water to its customers or its governmental customer’s end-use customers, as applicable. The Export Water revenues recognized by the Company are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). The water revenues recognized by the Company from the sale of water on the “Lowry Range” (described in Note 4 – Water and Land Assets in Part II, Item 8 of the 2016 Annual Report) are shown net of royalties paid to the Land Board and amounts retained by the District. The Company recognized $141,100 and $56,800 of metered water usage revenues during the three months ended November 30, 2016 and 2015, respectively.
The Company recognizes wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts retained by the District. The Company recognized $12,300 and $10,300 of wastewater treatment fees during the three months ended November 30, 2016 and 2015, respectively. Costs of delivering water and providing wastewater services to customers are recognized as incurred.
Tap and Construction Fees – The Company has various water and wastewater service agreements, a component of which may include tap and construction fees. The Company recognizes water tap fees as revenue ratably over the estimated service period upon completion of the “Wholesale Facilities” (defined in Part I, Item 1 of the 2016 Annual Report) constructed to provide service to Arapahoe County, Colorado (the “County”). The Company recognized $3,600 of water tap fee revenues during each of the three months ended November 30, 2016 and 2015, respectively. The water tap fees to be recognized over this period are net of the royalty payments to the Land Board and amounts paid to third parties pursuant to the CAA as further described in Note 4 – Long-Term Obligations and Operating Lease below.
Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
The Company had no Levelrecognized $10,400 of “Special Facilities” (defined in Part I, Item 1 of the 2016 Annual Report) funding as revenue during each of the three months ended November 30, 2016 and 2015, respectively. This is the ratable portion of the Special Facilities funding proceeds received from water agreements as more fully described in Note 2 assets or liabilities as– Summary of Significant Accounting Policies to the 2016 Annual Report.
As of November 30, 2015 or2016, and August 31, 2015.2016, the Company has deferred recognition of approximately $1,097,300 and $1,111,300, respectively, of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.
Level 3 — Valuations
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 assetscontract operations services.
Royalty and liabilities thatOther Obligations
Revenues from the sale of Export Water are derivedshown gross of royalties payable to the Land Board. Revenues from other valuation methodologies, including discounted cash flow modelsthe sale of water on the Lowry Range are shown net of the royalties to the Land Board and similar techniques,the amounts retained by the District.
Oil and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptionsGas 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 projections in determiningGas 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 fair value assigned to such assets or liabilities. The Company had no Level 3 liability as of November 30, 2015 orO&G Lease, during the year ended August 31, 2015.
The2011, the Company maintains policiesreceived an up-front payment of $1,243,400 for the purpose of exploring for, developing, producing and procedures to value instruments using what management believes to bemarketing oil and gas on approximately 634 acres of mineral estate owned by the best and most relevant data available.
The Company's non-financial assets measuredCompany at fair value on a non-recurring basis consist entirely of its investments“Sky Ranch” property (described in water and water systems, land held for sale, and other long-lived assets. See Note 34 – Water and Land Assetsbelow. to the 2016 Annual Report). The Company began recognizing the up-front payments as income on a straight-line basis over three years (the initial term of the O&G Lease) on March 10, 2011. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which was recognized as income on a straight-line basis over two years (the extension term of the O&G Lease). During the fiscal year ended August 31, 2014, the Company received an up-front payment of $72,000 for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Rangeview Lease”). The Company recognized $6,000 and $161,400 during each of the three months ended November 30, 2016 and 2015, respectively, of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease.
As of November 30, 2016 and August 31, 2016, the Company has deferred recognition of $13,000 and $19,000, respectively, of income related to the Rangeview Lease, which will be recognized into income ratably through June 2017.
During the three months ended February 28, 2015, two wells were drilled within the Company’s mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to the Company. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. During the three months ended November 30, 2016 and 2015, the Company received $68,100 and $122,100, respectively, in royalties attributable to these two wells.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the eventual use of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Capitalized Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.
Share-Based Compensation
The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options has no impact on the income tax provisions. The Company recognized $42,800 and $53,700 of share-based compensation expense during the three months ended November 30, 2016 and 2015, respectively.
Income Taxes
The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of November 30, 2016.
The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal year 2014 through fiscal year 2016. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At November 30, 2016, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended November 30, 2016 or 2015.
Discontinued Operations
In August 2015, the Company sold substantially all of its Arkansas River water and land properties. Pursuant to the terms of the purchase and sale agreement, the Company continued to manage and receive the lease income until December 31, 2015. The operating results and the assets and liabilities of the discontinued operations, which formerly comprised the agricultural segment, are presented separately in the Company’s consolidated financial statements. Summarized financial information for the discontinued agricultural business is shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued operation.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Discontinued Operations Income Statement |
| | |
| Three Months Ended November 30, |
| | |
Farm revenues | $- | $212,248 |
Farm expenses | - | (15,632) |
Gross (loss) profit | - | 196,616 |
| | |
General and administrative expenses | 19,626 | 171,902 |
Operating (loss) profit | (19,626) | 24,714 |
Finance charges | 946 | 15,951 |
Interest expense | - | (1,605) |
Income (loss) from discontinued operations | $(18,680) | $39,060 |
The Company anticipates continued expenses through calendar 2017 related to the discontinued operations. The Company will continue to incur expenses (including property taxes) related to the remaining agricultural land the Company continues to own and for the purpose of collecting outstanding receivables.
The individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued operation” and “Liabilities of discontinued operation” in the consolidated balance sheet. The carrying amounts of the major classes of assets and liabilities included part of the discontinued business are presented in the following table:
Discontinued Operations Balance Sheet |
| | |
| | |
Assets: | | |
Trade accounts receivable | $193,451 | $227,060 |
Land held for sale (*) | 453,182 | 450,347 |
Prepaid expenses | 720 | 2,880 |
Total assets | $647,353 | $680,287 |
| | |
Liabilities: | | |
Accrued liabilities | $6,042 | $4,394 |
Total liabilities | $6,042 | $4,394 |
(*) Land Held for Sale.During the fiscal quarter ended November 30, 2015, the Company purchased three farms totaling 700 acres for approximately $453,200. The farms were acquired in order to correct dry-up covenant issues related to water only farms in order obtain the release of the escrow funds related to the Company’s farm sale to Arkansas River Farms, LLC. The Company intends to sell the farms during fiscal year 2017.
Income (Loss) per Common Share
Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period. Common stock options and warrants aggregating 448,100 and 312,100 common share equivalents were outstanding as of November 30, 2016 and 2015, respectively, and have been included in the calculation of net income per common share but excluded from the calculation of loss per common share as their effect is anti-dilutive.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its consolidated financial statements and ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In May 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The Company is assessing the impact of ASU 2016-12, but it does not expect the adoption of ASU 2016-12 to have a material impact on its financial statements.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, reducing the complexity when applying the guidance for identifying performance obligations and improving the operability and understandability of the license implementation guidance. The Company is assessing the impact of ASU 2016-10, but it does not expect the adoption of ASU 2016-10 to have a material impact on its financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, clarifying the implementation guidance on principal versus agent considerations in the new revenue recognition standard. Specifically, ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company is assessing the impact of ASU 2016-08, but it does not expect the adoption of ASU 2016-08 to have a material impact on its financial statements.
In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to the exchange for those goods or services. The Company will adopt the guidance on September 1, 2018. The Company does not expect the adoption of the ASU to have a material impact on its wholesale water and wastewater and consulting fees as the underlying contracts with these customers are relatively straightforward and contain no complex components. The Company is currently assessing the impact of the ASU on its water and wastewater tap and construction fees. The Company anticipates this assessment to be completed in fiscal 2017.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the presentation and disclosure requirements for discontinued operations. The update was adopted by the Company in fiscal year 2016.
NOTE 2 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had none of these instruments as of November 30, 2016 or August 31, 2016.
Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had 61 and 36 Level 2 assets as of November 30, 2016 and August 31, 2016, respectively, which consist of certificates of deposit and U.S. treasury notes.
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had no Level 3 assets or liabilities as of November 30, 2016 or August 31, 2016.
The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.
Level 2 Asset – Available for Sale Securities. The Company’s available for sale securities are the Company’s only financial asset measured at fair value on a recurring basis. The fair value of the available for sale securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit and U.S. treasury notes.
The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems, land held for sale, and other long-lived assets. See Note 3 – Water and Land Assets below.
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of November 30, 2016:
| | | Fair Value Measurement Using: | |
| | | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | Accumulated Unrealized Gains and |
| | | | | | |
Available for sale | $21,758,691 | $21,780,902 | $- | $21,758,691 | $- | $(22,211) |
NOTE 3 – WATER AND LAND ASSETS
The Company'sCompany’s water rights and current water and wastewater service agreements are more fully described in Note 4 – Water and Land Assets in Part II, Item 8 of the 20152016 Annual Report. There have been no significant changes to the Company'sCompany’s water rights or water and wastewater service agreements during the three months ended November 30, 2015.2016.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
The Company'sCompany’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at November 30, 20152016 and August 31, 2015:2016:
| | November 30, 2015 | | | August 31, 2015 | |
| | Costs | | | Accumulated Depreciation and Depletion | | | Costs | | | Accumulated Depreciation and Depletion | |
Rangeview water supply | | $ | 14,444,600 | | | $ | (9,000 | ) | | $ | 14,444,600 | | | $ | (8,800 | ) |
Sky Ranch water rights and other costs | | | 6,440,800 | | | | (219,000 | ) | | | 6,440,800 | | | | (194,600 | ) |
Fairgrounds water and water system | | | 2,899,900 | | | | (820,700 | ) | | | 2,899,900 | | | | (798,700 | ) |
Rangeview water system | | | 1,256,300 | | | | (120,700 | ) | | | 1,256,300 | | | | (110,300 | ) |
Water supply – other | | | 3,995,700 | | | | (220,000 | ) | | | 3,973,300 | | | | (193,900 | ) |
Totals | | | 29,037,300 | | | | (1,389,400 | ) | | | 29,014,900 | | | | (1,306,300 | ) |
Net investments in water and water systems | | $ | 27,647,900 | | | | | | | $ | 27,708,600 | | | | | |
| | |
| | Accumulated Depreciation and Depletion | | Accumulated Depreciation and Depletion |
Rangeview water supply | $14,457,400 | $(9,600) | $14,444,600 | $(9,400) |
Sky Ranch water rights and other costs | 6,691,400 | (361,400) | 6,607,400 | (334,500) |
Fairgrounds water and water system | 2,899,800 | (908,800) | 2,899,900 | (886,800) |
Rangeview water system | 1,637,500 | (166,300) | 1,624,800 | (152,800) |
Water supply – other | 3,703,600 | (323,600) | 3,703,000 | (297,800) |
Construction in progress | 825,900 | - | 723,500 | - |
Totals | 30,215,600 | (1,769,700) | 30,003,200 | (1,681,300) |
Net investments in water and water systems | $28,445,900 | | $28,321,900 | |
Capitalized terms in this section not defined herein are defined in Note 4 – Water and Land Assets to the 20152016 Annual Report.
Depletion and Depreciation.The Company recorded depletion charges of $100$300 and $2,500$100 during the three months ended November 30, 20152016 and 2014,2015, respectively. During the three months ended November 30, 2015, this2016, the depletion was related entirely to the Rangeview Water Supply, and during the three months ended November 30, 2014, this related to the Rangeview Water Supply and Sky Ranch water assets.
The Company recorded $94,500$115,700 and $76,40094,500 of depreciation expense during the three months ended November 30, 2016 and 2015, and 2014, respectively.
Land Held These figures include depreciation for Sale. Duringother equipment not included in the fiscal quarter ended November 30, 2015 the Company purchased three farms for approximately $443,600. The Company acquired a total of 700 acres. The farms were acquired in order to correct dry-up covenant issues related to water only farms in order obtain the release of the escrow funds related to the Company's farm sale to Arkansas River Farms, LLC. The Company intends to sell the farms within the next fiscal year.
NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE
The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular format, but is described below.
Participating Interests in Export Water Supply
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Company'sCompany’s Export Water (described in greater detail in Note 4 – Water and Land Assetsto the 20152016 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'sCompany’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. If the Company does not sell the Export Water, the holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supply liability account), with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.
From time to time, the Company repurchasedreacquired various portions of the CAA obligations, retainingwhich retained their original priority, and in 2014, the Land Board relinquished its CAA interest to the Company.priority. The Company did not make any CAA acquisitions during the three months ended November 30, 20152016 or 2014.2015.
As a result of the acquisitions the relinquishment by the Land Board, and the sale of Export Water, as detailed in the table below, the remaining potential third-party obligation at November 30, 2015,2016, is approximately $1 million, and the Company has the right to approximately $29.8 million:million in Export Water proceeds:
10 | Export Water Proceeds Received | Initial Export Water Proceeds to Pure Cycle | Total Potential Third-Party Obligation | Paticipating Interests Liability | |
Original balances | $– | $218,500 | $31,807,700 | $11,090,600 | $20,717,100 |
Activity from inception until August 31, 2015: | | | | | |
Acquisitions | – | 30,428,900 | (30,428,900) | (10,622,100) | (19,806,800) |
Option payments - Sky Ranch | | | | | |
and The Hills at Sky Ranch | 110,400 | (42,300) | (68,100) | (23,800) | (44,300) |
Arapahoe County tap fees * | 533,000 | (373,100) | (159,900) | (55,800) | (104,100) |
Export Water sale payments | 618,400 | (489,100) | (129,300) | (44,900) | (84,400) |
Balance at August 31, 2016 | 1,261,800 | 29,742,900 | 1,021,500 | 344,000 | 677,500 |
Fiscal 2017 activity: | | | | | |
Export Water sale payments | 37,200 | (32,700) | (4,500) | (1,600) | (2,900) |
Balance at November 30, 2016 | $1,299,000 | $29,710,200 | $1,017,000 | $342,400 | $674,600 |
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2015
| | Export Water Proceeds Received | | | Initial Export Water Proceeds to Pure Cycle | | | Total Potential Third-Party Obligation | | | Paticipating Interests Liability | | | Contingency | |
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 | | | 569,200 | | | | (445,800 | ) | | | (123,400 | ) | | | (42,900 | ) | | | (80,500 | ) |
Balance at August 31, 2015 | | | 1,212,600 | | | | 29,786,200 | | | | 1,027,400 | | | | 346,000 | | | | 681,400 | |
Fiscal 2016 activity: | | | | | | | | | | | | | | | | | | | | |
Export Water sale payments | | | 11,900 | | | | (10,400 | ) | | | (1,500 | ) | | | (500 | ) | | | (1,000 | ) |
Balance at November 30, 2015 | | $ | 1,224,500 | | | $ | 29,775,800 | | | $ | 1,025,900 | | | $ | 345,500 | | | $ | 680,400 | |
* The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board.
The CAA includes contractually established priorities that call for payments to CAA holders in order of their priority. This means the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. The Company will receive approximately $6 million of the first priority payout (the remaining entire first priority payout totals approximately $6.8$6.7 million as of November 30, 2015)2016).
WISE Partnership
During December 2014, the Company, through the District,, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the "WISE“WISE Partnership Agreement"Agreement”), among the City and County of Denver acting through its Board of Water Commissioners ("(“Denver Water"Water”), the City of Aurora acting by and through its Utility Enterprise ("(“Aurora Water"Water”), and the South Metro WISE Authority ("SMWA"(“SMWA”). The SMWA was formed by the District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the "SM IGA"“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"(“WISE”) created by the WISE Partnership Agreement. The SM IGA specifies each member'smember’s pro rata share of WISE and the members'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“WISE Financing Agreement"Agreement”) between the Company and the District, the Company has an agreement to fund the District'sDistrict’s participation in WISE effective as of December 22, 2014. The Company'sCompany’s cost of funding the District'sDistrict’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 $5.8$5.6 million over the next five years. See further discussion in Note 6–Related Party Transactions.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Operating Lease
Effective January 2015,2016, the Company entered into an operating lease for approximately 2,500 square feet of office and warehouse space. The lease has a one-year term with payments of $3,000 per month. After the end of the fiscal quarter ended November 30, 2015, theThe Company renewed the operatingintends to renew this lease for an additional one-year term with payments of $3,000 per month.in January 2017 on similar terms.
NOTE 5 – SHAREHOLDERS'SHAREHOLDERS’ EQUITY
The Company maintains the 2014 Equity Incentive Plan (the "2014“2014 Equity Plan"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“2004 Incentive Plan"Plan”), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.
The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the three months ended November 30, 2015:2016:
| | Number of Options | | | Weighted-Average Exercise Price | | | Weighted-Average Remaining Contractual Term | | | Approximate Aggregate Instrinsic Value | | | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term | Approximate Aggregate Instrinsic Value |
Oustanding at beginning of period | | | 312,000 | | | $ | 6.61 | | | | | | | | |
Oustanding at August 31, 2016 | | 338,000 | $4.83 | |
Granted | | | - | | | | - | | | | | | | | 110,000 | 5.58 | |
Exercised | | | - | | | | - | | | | | | | | - | |
Forfeited or expired | | | - | | | | - | | | | | | | | - | - | |
Outstanding at November 30, 2015 | | | 312,000 | | | $ | 6.61 | | | | 5.93 | | | $ | 266,720 | | |
Outstanding at November 30, 2016 | | 448,000 | $4.97 | 6.52 | $267,540 |
| | | | | | | | | | | | | | | | | |
Options exercisable at November 30, 2015 | | | 252,667 | | | $ | 5.09 | | | | 5.37 | | | $ | 243,320 | | |
Options exercisable at November 30, 2016 | | 302,000 | $4.83 | 5.11 | $242,680 |
The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the three months ended November 30, 2015:2016:
| | Number of Options | | | Weighted-Average Grant Date Fair Value | |
Non-vested options oustanding at beginning of period | | | 59,333 | | | $ | 4.59 | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Non-vested options outstanding at November 30, 2015 | | | 59,333 | | | $ | 4.59 | |
| | Weighted-Average Grant Date Fair Value |
Non-vested options oustanding at August 31, 2016 | 36,000 | $2.89 |
Granted | 110,000 | 3.73 |
Vested | - | - |
Forfeited | - | - |
Non-vested options outstanding at November 30, 2016 | 146,000 | $3.52 |
All non-vested options are expected to vest.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Stock-based compensation expense was $53,700$42,800 and $68,800$53,700 for the three months ended November 30, 20152016 and 2014,2015, respectively.
At November 30, 2015,2016, the Company had unrecognized expenses relating to non-vested options that are expected to vest totaling $113,500,$293,600, which options have a weighted average life of less than three years. The Company has not recorded any excess tax benefits to additional paid-in capital.
NOTE 6 – RELATED PARTY TRANSACTIONS
On December 16, 2009, the Company entered into a Participation Agreement with the District, whereby the Company agreed to provide funding to the District in connection with the District joining the South Metro Water Supply Authority ("SMWSA"(“SMWSA”). On November 10, 2014, the Company and the District entered into the WISE Financing Agreement which become effective December 22, 2014, whereby the Company agreed to fund the District'sDistrict’s cost of participating in a regional water supply project known as the WISE partnership. The Company anticipates investingspending approximately $1.2$5.6 million per year forover the next five fiscal years for additional payments forto fund the District’s purchase of its share of the water transmission line and additional facilities, water and related assets for the WISE project.and to fund operations and water deliveries related to WISE.
In 1995, the Company extended a loan to the District, a related party. The loan provided for borrowings of up to $250,000, is unsecured, bears interest based on the prevailing prime rate plus 2% (5.25%(5.50% at November 30, 2015)2016) and was scheduled to mature on December 31, 2014. The Company extended the maturity date of the loan tois December 31, 2020. Beginning in January 2014, the District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement remains in effect. The $594,400$652,200 balance of the note receivable at November 30, 2015,2016, includes borrowings of $237,000$283,700 and accrued interest of $357,400.$368,500.
Each year, beginning in 2012, the Company has entered into an Operation Funding Agreement with Sky Ranch Metropolitan District No. 5 obligating the Company to advance funding to the district for the district’s operations and maintenance expenses for the then current calendar year. The district is expected to repay the amounts advanced pursuant to the funding agreements from future revenues from property tax assessments. All payments are subject to annual appropriations by the district in its absolute discretion. The advances by the Company accrue interest at a rate of 8% per annum from the date of the advance.
In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with Sky Ranch Metropolitan District No. 5 obligating the Company to either finance district improvements or to construct improvements on behalf of the district subject to reimbursement. Improvements subject to this agreement are determined pursuant to a mutually agreed upon budget. Each year in September, the parties are to mutually determine the improvements required for the following year and finalize a budget by the end of October. Each advance or reimbursable expense accrues interest at a rate of 6% per annum. No payments are required by the district unless and until the district issues bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred.
The $165,600 balance of the receivable due pursuant to the Operation Funding Agreements and the Facilities Funding and Acquisition Agreement at November 30, 2016, includes advances of $142,000 and accrued interest of $23,600. Upon the district’s ratification of the advances and related expenditures, the amount was reclassified to long-term and is recorded as part of Notes receivable – related parties.
NOTE 7 – SIGNIFICANT CUSTOMERS
The Company sells wholesale water and wastewater services to the District pursuant to the Rangeview Water Agreements (defined in Note 4 – Water and Land Assets to the 20152016 Annual Report). Sales to the District accounted for 70%39% and 9%70% of the Company'sCompany’s total water and wastewater revenues for the three months ended November 30, 20152016 and 2014,2015, respectively. The District has one significant customer.customer, the Ridgeview Youth Services Center. Pursuant to the Rangeview Water Agreements, the Company is providing water and wastewater services to this customer on behalf of the District. The District'sDistrict’s significant customer accounted for 61%31% and 7%61% of the Company'sCompany’s total water and wastewater revenues for the three months ended November 30, 20152016 and 2014,2015, respectively.
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2016
Revenues related to the provision of water for the oil and gas industry to one customer accounted for 88%52% of the Company'sCompany’s water and wastewater revenues for the three months ended November 30, 2014.2016, respectively. The Company had no revenues related to the provision of water for the oil and gas industry for the three months ended November 30, 2015.
The Company had accounts receivable from the District which accounted for 9%50% and 11%74% of the Company'sCompany’s wholesale water and wastewater trade receivables balances at November 30, 20152016 and August 31, 2015,2016, respectively. Accounts receivable from the District'sDistrict’s largest customer accounted for 8%42% and 10%63% of the Company'sCompany’s water and wastewater trade receivables as of November 30, 20152016 and August 31, 2015,2016, respectively.
NOTE 8 – ACCRUED LIABILITIES
At November 30, 2015,2016, the Company had accrued liabilities of $194,200,$63,700, of which $131,400$7,900 was for estimated property taxes, $18,100$24,500 was for professional fees, and $44,700$31,400 was for operating payables.
At August 31, 2015,2016, the Company had accrued liabilities of $590,500,$242,600, of which $400,000$160,000 was for accrued compensation, $95,500$5,700 was for estimated property taxes, $52,500$48,000 was for professional fees and the remaining $42,500$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'sCompany’s financial position, results of operations or cash flows.
NOTE 10 – SEGMENT INFORMATION
ThePrior to the sale of the Company’s agricultural assets and the residual operations through December 31, 2015, the Company operatesoperated primarily in two lines of business: (i) the wholesale water and wastewater business; and (ii) the agricultural farming business. The Company provideshas discontinued its agricultural farming operations. The Company will continue to operate its wholesale water and wastewater services segment as its only line of business. The wholesale water and wastewater services business includes selling to customers using water rights owned by the Company and developsto develop infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater. The Company's agricultural business consists of the Company leasing its Arkansas River Valley land and water to area farmers under cash leases or in certain cases crop share leases. The following tables show information by operating segment for the three months ended November 30, 2015 and 2014:
Three Months Ended November 30, 2015 | |
| | | | | | | | | | | | |
| | Business segments | | | | | | | |
| | Wholesale | | | | | | | | | | |
| | Water and | | | | | | | | | | |
| | Wastewater | | | Agricultural | | | All Other | | | Total | |
| | | | | | | | | | | | |
Revenues | | $ | 67,100 | | | $ | 212,200 | | | $ | 58,800 | | | $ | 338,100 | |
Gross profit | | | (49,000 | ) | | | 196,600 | | | | 43,000 | | | | 190,600 | |
Depreciation | | | 94,600 | | | | - | | | | - | | | | 94,600 | |
Other significant noncash items: | | | | | | | | | | | | | | | | |
Stock-based compensation | | | - | | | | - | | | | 53,700 | | | | 53,700 | |
Segment assets | | | 28,892,800 | | | | 6,208,300 | | | | 37,071,100 | | | | 72,172,200 | |
Expenditures for segment assets | | | 271,200 | | | | - | | | | 2,800 | | | | 274,000 | |
Three Months Ended November 30, 2014 | |
| | | | | | | | | | | | |
| | Business segments | | | | | | | |
| | Wholesale | | | | | | | | | | |
| | Water and | | | | | | | | | | |
| | Wastewater | | | Agricultural | | | All Other | | | Total | |
| | | | | | | | | | | | |
Revenues | | $ | 503,500 | | | $ | 263,800 | | | $ | 66,500 | | | $ | 833,800 | |
Gross profit | | | 316,900 | | | | 237,300 | | | | 56,400 | | | | 610,600 | |
Depreciation | | | 78,900 | | | | - | | | | - | | | | 78,900 | |
Other significant noncash items: | | | | | | | | | | | | | | | | |
Stock-based compensation | | | - | | | | - | | | | 68,800 | | | | 68,800 | |
TPF interest expense | | | 23,800 | | | | - | | | | - | | | | 23,800 | |
Segment assets | | | 98,358,500 | | | | 7,561,200 | | | | 2,152,300 | | | | 108,072,000 | |
Expenditures for segment assets | | | 1,151,400 | | | | 2,900 | | | | - | | | | 1,154,300 | |
NOTE 11 – SUBSEQUENT EVENTEVENTS
After
The Company entered into a contract with Nelson Pipeline to construct the Company's quarter ended November 30, 2015,Sky Ranch water transmission line for approximately $4.5 million, to interconnect the Lowry Range water system to the development at Sky Ranch. Construction began on the water transimission line on December 12, 2016.
On December 15, 2016 the District, acting by and through its Water Activity Enterprise, entered into a Water Service Agreement with Elbert & Highway 86 Commercial Metropolitan District, acting by and through its Water Enterprise. Upon closing, the agreement will result in the Company, receivedin its capacity as the $1,342,300 escrow receivable relatedexclusive service provider for Rangeview, acquiring the right to provide water service to Wild Pointe Ranch located in unincorporated Elbert County Colorado, in exchange for $1,600,000 cash. The closing of the farm sale.transactions contemplated by the Water Service Agreement is expected to occur no later than February 23, 2017. For additional information see the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2016.
14
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"“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“Disclosure Regarding Forward-Looking Statements"Statements” below.
The following Management'sManagement’s Discussion and Analysis ("(“MD&A"&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 2015 Annual Report on Form 10-K for the fiscal year ended August 31, 2016 (the "2015“2016 Annual Report"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 and farming operations; |
●
| · | Expenses associated with developing our water and land assets; and |
Revenue generated from providing water and wastewater services; | · | Cash available to continue development of our water rights and service agreements. |
●
Expenses associated with developing our water and land assets; and
●
Cash available to continue development of our water rights 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,"” “us,” or "our"“our”) is a Colorado corporation that (i) provides wholesale water and wastewater services to end-use customers of governmental entities and to commercial and industrial customers and (ii) until the end of calendar 2015, managesmanaged land and water assets for farming.
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 a total of approximately 3,300 acre feet of tributary surface water, 20,45026,985 acre feet of non-tributary and not non-tributary groundwater rights, and approximately 26,000 acre feet of adjudicated surface reservoir sites that we refer to as our "Rangeview“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." We estimate thatOf the approximately 26,985 acre feet of water comprising our Rangeview Water Supply, we own 11,650 acre feet of water supplieswhich we can provide wholesaleexport form the Lowry Range (“Export Water”), which consists of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water, servicepending 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 13,685 acre feet of groundwater and approximately 60,000 single family equivalent ("SFE") connections.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 (the "District"“District”). We provide service to the District and its end-use customers pursuant to the Rangeview Water Agreements (defined in Part I, Item 1–1 – Business – Our Water and Land Assets in the 20152016 Annual Report). Through the District, we serve 258 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 our service areas 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 not currently selling water to one company in the oil and gas industry.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.
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"(“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 which time we intend to discontinue our farm operations.2015.
After closing the sale of our farm portfolio, we purchased approximately 465700 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. AfterDuring the end of the first quarter ended February 29, 2016, we resolved the dry-up covenant issues, the escrow proceeds were distributed to us, and the 465700 acres will beare held as "land“land for sale."sale” and recorded as part of Assets of discontinued operations.
Based on total acreage, approximately two-thirds ofWe have discontinued our farm operations are managed through cash lease arrangements with local area farmers, whereby we charge a fixed feeand will continue to lease our land andliquidate the water for agricultural purposes to tenant farmers. Based on total acreage, approximately one-thirdremaining assets in this line of our farm operations are managed through crop share leases, pursuant to which we and the tenant farmer jointly share in the gross revenues generated from the crops grown under a 75% farmer, 25% landlord participation. The majority of crops grown on our farms are alfalfa, with a number of acres also planted with corn, sorghum, and wheat.business.
Sky Ranch
We also own 931 acres of land along the I-70 corridor east of Denver, Colorado. We are currently leasing this land to an area farmer until such time as the property can be developed.
These land interests are described in the Arkansas River Assetsand Sky Ranch sections of Note 4 –Water and Land Assets in Part II, Item 8 of the 20152016 Annual Report.
Results of Operations
Executive Summary
The results of our operations for the three months ended November 30, 20152016 and 20142015 are as follows:
|
| Three months ended November 30, | |
| | | | |
Millions of gallons of water delivered | 17.9 | 7.9 | 10.0 | 127% |
Metered water usage revenues | $141,100 | $56,800 | $84,300 | 148% |
Operating costs to deliver water | $79,900 | $67,300 | $12,600 | 19% |
(excluding depreciation and depletion) | | | | |
Water delivery gross margin % | 43% | -18% | | |
| | | | |
Wastewater treatment revenues | $12,300 | $10,300 | $2,000 | 19% |
Operating costs to treat wastewater | $7,600 | $7,100 | $500 | 7% |
Wastewater treatment gross margin % | 38% | 31% | | |
| | | | |
Other income | $31,700 | $44,900 | $(13,200) | -29% |
Other income costs incurred | $16,300 | $15,900 | $400 | 3% |
Other income gross margin % | 49% | 65% | | |
| | | | |
Tap and specialty facility revenues | $14,000 | $14,000 | $- | 0% |
| | | | |
General and administrative expenses | $443,240 | $422,356 | $20,884 | 5% |
Loss from continuing operatons | $319,300 | $136,600 | $182,700 | 134% |
(Loss) income from discontinued operations | $(18,680) | $39,100 | $(57,780) | 148% |
Net (loss) income | $(337,980) | $(97,500) | $(202,280) | -247% |
Table 1- Summary Results of Operations | |
| | Three Months Ended November 30, | | | | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | |
Millions of gallons of water delivered | | | 7.9 | | | | 46.5 | | | | (38.6 | ) | | | -83 | % |
Metered water usage revenues | | $ | 56,800 | | | $ | 491,800 | | | $ | (435,000 | ) | | | -88 | % |
Operating costs to deliver water | | $ | 67,300 | | | $ | 136,800 | | | $ | (69,500 | ) | | | -51 | % |
(excluding depreciation and depletion) | | | | | | | | | | | | | | | | |
Water delivery gross margin % | | | -18 | % | | | 72 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Wastewater treatment revenues | | $ | 10,300 | | | $ | 11,700 | | | $ | (1,400 | ) | | | -12 | % |
Operating costs to treat wastewater | | $ | 7,100 | | | $ | 6,400 | | | $ | 700 | | | | 11 | % |
Wastewater treatment gross margin % | | | 31 | % | | | 45 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Other income | | $ | 44,900 | | | $ | 52,500 | | | $ | (7,600 | ) | | | -14 | % |
Other income costs incurred | | $ | 15,900 | | | $ | 10,100 | | | $ | 5,800 | | | | 57 | % |
Other income gross margin % | | | 65 | % | | | 81 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Tap and specialty facility revenues | | $ | 14,000 | | | $ | 14,000 | | | $ | - | | | | 0 | % |
| | | | | | | | | | | | | | | | |
Farm operations revenues | | $ | 212,200 | | | $ | 263,800 | | | $ | (51,600 | ) | | | -20 | % |
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 decreased 83%increased 127% and water revenues decreased 88%increased 148% during the three months ended November 30, 2015,2016, as compared to the three months ended November 30, 2014.2015. The decreasesincrease in water deliveries and revenues are primarily the result of a reductionan increase in demand for water by thefor oil and gas industry,operations, which wasis used primarily to frack wells drilled in the Niobrara formation. The decreaseThere were no frack wells drilled in the price of oil has caused oilfiscal 2016 and gas producersone frack well drilled to date in the area to limit drilling, which has in turn reduced demand for water.fiscal 2017. 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 months ended November 30, 2016 and 2015, and November 30, 2014.
Table 2 - Water Revenue Summary | |
| | | Three Months Ended November 30, | |
| | | 2015 | | | 2014 | |
Customer Type | | | Sales | | | kgal | | | Average Price per kgal | | | Sales | | | kgal | | | Average Price per kgal | |
On Site - Commercial | | | $ | 35,900 | | | | 6,482.0 | | | $ | 5,54 | | | $ | 31,600 | | | | 3,620.6 | | | $ | 8.73 | |
Export - Commercial | | | | 20,900 | | | | 1,395.4 | | | | 14.98 | | | | 8,600 | | | | 574.1 | | | | 14.98 | |
Fracking | | | | - | | | | - | | | | - | | | | 451,600 | | | | 42,286.5 | | | | 10.68 | |
| | | $ | 56,800 | | | | 7,877.4 | | | $ | 7.21 | | | $ | 491,800 | | | | 46,481.2 | | | $ | 10.58 | |
respectively.
Table 2 - Water Revenue Summary |
| Three months ended November 30, |
| | |
Customer Type | | | | | | |
On Site | $47,200 | 8,996.2 | $5.25 | $35,900 | 6,482.0 | $5.54 |
Export - Commercial | 13,600 | 1,249.2 | 10.89 | 20,900 | 1,395.4 | 14.98 |
Fracking | 80,300 | 7,638.7 | 10.51 | - | - | - |
| $141,100 | 17,884.1 | $7.89 | $56,800 | 7,877.4 | $7.21 |
The gross margin on delivering water decreasedincreased to 43% during the three months ended November 30, 2016, compared to a loss of 18% during the three months ended November 30, 2015, compared to a positive2015. The change in our gross margin of 72% during the three months ended November 30, 2014was due to an increased demand for water and our ability to apply the decrease in water deliveries. The Company is obligatedrevenue from those deliveries to pay certain lease and operatingoffset the fixed costs related toof the ECCV system (defined under Liquidity, Capital Resources and Financial PlanningPosition below). The system currently costs approximately $9,900$500 per month to maintain without any production. We have not had productionproduced approximately 10.9 million gallons through the ECCV system since November 2014, which has negatively impacted our gross margin for the three months ended November 30, 2015.2016, which has positively impacted our gross margin.
Wastewater Treatment Revenues –Our wastewater customer is charged based on the estimated amount of wastewater treated.
Wastewater fees decreased 12%increased 19% during the three months ended November 30, 2015,2016, as compared to the three months ended November 30, 2014.2015. The decreaseincrease was primarily the result of decreasedincreased 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 as revenue ratably over the estimated service period upon completion of the "Wholesale Facilities"“Wholesale Facilities” (defined in the 20152016 Annual Report) constructed to provide service to Arapahoe County, Colorado (the "County"“County”). We recognized approximately $3,600 of water tap fee revenues during each of the three months ended November 30, 2016 and 2015, and 2014.respectively. The water tap fees to be recognized over these periods are net of the royalty payments to the State of ColoradoLand Board of Land Commissioners (the "Land Board") and amounts paid to third parties pursuant to the "CAA,"“CAA,” which is described in Note 4 – Long-Term Obligations and Operating Lease to the accompanying consolidated financial statements.
We recognized approximately $10,400 of "Special Facilities"“Special Facilities” (defined in the 20152016 Annual Report) funding as revenue during each of the three months ended November 30, 2016 and 2015, and 2014.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 20152016 Annual Report.
At November 30, 2015,2016, we have deferred recognition of approximately $1.1 million of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.
The District'sDistrict’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 months ended November 30, 20152016 or 2014.2015.
Other Income –Other income consisted principally of consulting fees of $33,700$31,700 and $17,600$44,900 for the three months ended November 30, 2016 and 2015, and 2014, respectively. The increaserespectively, consisted principally of consulting fees. For the three months ended November 30, 2015, we included $11,200 in fees isother income related to a cost-sharing arrangement for our industrial water sales. This cost-sharing agreement did not extend to the result ofindustrial water sales for the additional management of new water systems. We have increased from managing two systems during fiscal 2014 to four systems during fiscal 2015. Ourthree months ended November 30, 2016. Additionally, our margins have fluctuated as we allocated additional staff costs to system management. Other income also included $11,200 and $34,900 for the three months ended November 30, 2015 and 2014, respectively, from a cost-sharing arrangement for our industrial water sales to the fracking industry.
Farm Operations Revenues – Our farming operations include revenues from leases on the farms we owned in the Arkansas River Valley.
Lease income from our farming operations decreased by 20% during the three months ended November 30, 2015, compared to the three months ended November 30, 2014. The decrease was primarily the result of us converting several of our farms to crop share leases. Crop production on several of the crop share lease farms was substantially lower than we anticipated due to lower than expected yields and crop prices. We have adjusted our accrual based on revised production estimates and current crop prices.
The following charts detail our farm revenue by lease type, acres, and the average revenue per acre for the three months ended November 30, 2015 and 2014.
Table 3 - Farm Summary | |
| | Three Months Ended November 30, 2015 | | | Three Months Ended November 30, 2014 | |
Lease Type | | Sales | | | Acres | | | Average Revenue per Acre | | | Sales | | | Acres | | | Average Revenue per Acre | |
Arkansas Cash | | $ | 189,300 | | | | 7,367 | | | $ | 25.70 | | | $ | 231,500 | | | | 9,589 | | | $ | 24.14 | |
Arkansas Pasture | | | 2,800 | | | | 1,073 | | | | 2.61 | | | | 2,500 | | | | 1,131 | | | | 2.21 | |
Arkansas Water shares | | | 22,900 | | | | N/ | A | | | N/ | A | | | 19,400 | | | | N/ | A | | | N/ | A |
Arkansas Crop Share | | | (2,800 | ) | | | 4,144 | | | | (0.68 | ) | | | 10,400 | | | | 1,896 | | | | 5.49 | |
Arkansas Held for Sale | | | N/ | A | | | 700 | | | | N/ | A | | | N/ | A | | | N/ | A | | | N/ | A |
Arkansas Not Farmed | | | - | | | | 2,021 | | | | - | | | | - | | | | 1,988 | | | | - | |
Sky Ranch | | | - | | | | 931 | | | | - | | | | - | | | | 931 | | | | - | |
| | $ | 212,200 | | | | 15,536 | | | $ | 13.66 | | | $ | 263,800 | | | | 15,535 | | | $ | 16.98 | |
· | Prior to selling our farm assets in August 2015, we farmed approximately 14,600 acres. Although we sold our farm assets in August 2015, pursuant to the terms of the purchase and sale agreement, we will retain revenues from the farm assets through December 2015. |
· | We estimate our crop share revenues based on anticipated production and anticipated commodity prices ratably throughout the calendar year. A number of our farms did not reach the expected production levels and crop prices decreased during the quarter, resulting in a decrease in our expected revenues for crop shares during the three months ended November 30, 2015. |
General and Administrative Expenses
Significant balances classified as general and administrative ("(“G&A"&A”) expenses for the three months ended November 30, 20152016 and 2014,2015, respectively, were:
Table 4 - Signficant Balances in G&A | | |
Table 3 - Signficant Balances in G&A | | Table 3 - Signficant Balances in G&A |
| | Three Months Ended November 30, | | | | | Three months ended November 30, | |
| | 2015 | | | 2014 | | | $ Change | | | % Change | | | | | |
Salary and salary related expenses: | | | | | | | | | | | | | |
Salary and salary-related expenses: | | |
Including share-based compensation | | $ | 226,200 | | | $ | 201,600 | | | $ | 24,600 | | | | 12 | % | $218,200 | $226,200 | $(8,000) | -4% |
Excluding share-based compensation | | $ | 172,500 | | | $ | 132,800 | | | $ | 39,700 | | | | 30 | % | $175,400 | $172,500 | $2,900 | 2% |
FLCC water assessment fees | | $ | 104,300 | | | $ | 74,600 | | | $ | 29,700 | | | | 40 | % | |
Professional fees | | $ | 83,400 | | | $ | 224,300 | | | $ | (140,900 | ) | | | -63 | % | $62,300 | $66,000 | $(3,700) | -6% |
Fees paid to directors (including insurance) | | $ | 30,000 | | | $ | 28,500 | | | $ | 1,500 | | | | 5 | % | $34,300 | $30,000 | $4,300 | 14% |
Public entity related expenses | | $ | 31,600 | | | $ | 23,300 | | | $ | 8,300 | | | | 36 | % | $28,400 | $31,600 | $(3,200) | -10% |
Property taxes | | $ | 35,900 | | | $ | 40,200 | | | $ | (4,300 | ) | | | -11 | % | |