PURE CYCLE CORP
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2016
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-8814
|
PURE CYCLE CORPORATION
|
|
|
(Exact name of registrant as specified in its charter)
|
|
Colorado
|
84-0705083
|
|
(State or other jurisdiction of incorporation
or organization)
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
34501 E. Quincy Ave., Bldg. 34, Box 10
Watkins, CO 80137
|
(303) 292-3456
|
|
(Address of principal executive offices) (Zip Code)
|
(Registrant’s telephone number, including area
code)
|
|
|
|
|
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Common Stock 1/3 of $.01 par value
|
The NASDAQ Stock Market, LLC
|
|
(Title of each class)
|
(Name of each exchange on which registered)
|
|
Securities registered pursuant to Section
12(g) of the Act:
NONE
|
|
|
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [X]
|
|
|
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
[ ] No [X]
|
|
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
[X] No [ ]
|
|
|
|
|
|
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [X] No
[ ]
|
|
|
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K
[X]
|
|
|
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act:
|
|
|
Large
accelerated filer[ ]Accelerated filer[X]Non-accelerated filer[ ](Do
not check if a smaller reporting company)Smaller reporting company[
]
|
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
|
|
|
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid
and asked price of such common equity, as of the last business day
of the registrant’s most recently completed second fiscal
quarter: $78,578,883
|
|
|
Indicate the number of shares outstanding of
each of the registrant’s classes of common stock, as of the
latest practicable date: October 27, 2016:
23,754,098
|
|
|
|
|
|
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference
from the registrant’s definitive proxy statement for the
Annual Meeting of Shareholders to be held in January 2017, which
will be filed with the SEC within 120 days of the close of the
fiscal year ended August 31, 2016.
|
Table of Contents
|
Item
|
|
Page
|
|
|
Part I
|
|
|
|
|
|
|
1
|
Business
|
3
|
|
|
|
|
|
1A.
|
Risk
Factors
|
17
|
|
|
|
|
|
1B.
|
Unresolved
Staff Comments
|
23
|
|
|
|
|
|
2
|
Properties
|
23
|
|
|
|
|
|
3
|
Legal
Proceedings
|
23
|
|
|
|
|
|
4
|
Mine
Safety Discolosures
|
23
|
|
|
|
|
|
|
Part
II
|
|
|
|
|
|
|
5
|
Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
24
|
|
|
|
|
|
6
|
Selected
Financial Data
|
26
|
|
|
|
|
|
7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
|
|
|
|
|
|
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
37
|
|
|
|
|
|
8
|
Consolidated
Financial Statements and Supplementary Data
|
38
|
|
|
|
|
|
9
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
39
|
|
|
|
|
|
9A.
|
Controls
and Procedures
|
39
|
|
|
|
|
|
9B.
|
Other
Information
|
40
|
|
|
|
|
|
|
Part
III
|
|
|
|
|
|
|
10
|
Directors,
Executive Officers and Corporate Governance
|
40
|
|
|
|
|
|
11
|
Executive
Compensation
|
40
|
|
|
|
|
|
12
|
Security Ownership
of Certain Beneficial Owners and Managemetnt and Related
Stockiholder Matters
|
40
|
|
|
|
|
|
13
|
Certain
Relationships and Related Transactions and Director
Independence
|
40
|
|
|
|
|
|
14
|
Principal
Accountant Fees and Services
|
40
|
|
|
|
|
|
|
Part
IV
|
|
|
|
|
|
|
15
|
Exhibits
and Financial Statement Schedules
|
41
|
|
|
|
|
|
|
Signatures
|
42
|
i
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts
contained in this Annual Report on Form 10-K, or incorporated by
reference into this Form 10-K, are
“forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
The words “anticipate,”
“seek,” “project,” “future,”
“likely,” “believe,” “may,”
“should,” “could,” “will,”
“estimate,” “expect,” “plan,”
“intend” and similar expressions, as they relate to us,
are intended to identify forward-looking statements.
Forward-looking statements include statements relating to, among
other things:
●
factors affecting demand for water;
●
our competitive advantage;
●
plans to develop additional water assets within the Denver
area;
●
future water supply needs in Colorado and how such needs will be
met;
●
anticipated increases in residential and commercial demand for
water services and competition for these services;
●
estimated population increases in the Denver metropolitan area and
the South Platte River basin;
●
plans for the use and development of our water assets and potential
delays;
●
plans to provide water for drilling and hydraulic fracturing of oil
and gas wells;
●
changes in oil and gas drilling activity on our property and on the
Lowry Range;
●
regional cooperation among area water providers in the development
of new water supplies and water storage, transmission and
distribution systems as the most cost-effective way to expand and
enhance service capacities;
●
the impact of individual housing and economic cycles on the number
of connections we can serve with our water;
●
increases in future water tap fees;
●
negotiation of payment terms for fees;
●
plans for development of our Sky Ranch property;
●
the number of units planned for the first phase of development at
Sky Ranch;
●
anticipated revenues from full development of our Sky Ranch
property;
●
the impact of the downturn in the homebuilding and credit markets
on our business and financial condition;
●
the sufficiency of our working capital and financing sources to
fund our operations;
●
estimated supply capacity of our water assets;
●
need for additional production capacity;
●
use of raw and reclaimed water for outdoor irrigation;
●
costs and plans for treatment of water and wastewater;
●
plans to use effluent water for agricultural and irrigation
uses;
●
participation in regional water projects, including
“WISE” and the timing and availability of water from
WISE;
●
our ability to assist Colorado “Front Range” water
providers in meeting current and future water needs;
●
timing of and interpretation of Land Board royalties;
●
the number of new water connections needed to recover the costs of
our water supplies;
●
the adequacy of the provisions in the “Lease” for the
Lowry Range to cover present and future circumstances;
●
plans for office space;
●
factors that may impact labor and material costs;
●
loss of key employees and hiring additional personnel for our
operations;
●
anticipated timing and amount of, and sources of funding for (i)
capital expenditures to construct infrastructure and increase
production capacities, (ii) compliance with water, environmental
and other regulations, and (iii) operations including delivery and
treatment of water and wastewater;
●
the ability of our deep water well enhancement tool and process to
increase efficiency of wells and our plans to market that product
to area water providers;
●
our ability to reduce the amount of up-front construction costs for
water and wastewater systems;
●
ability to generate working capital and market our water
assets;
1
●
plans to sell certain farms and recover the costs associated with
acquiring those farms;
●
service life of constructed facilities;
●
use of third parties to construct facilities required to extend
water and wastewater services;
●
payment of amounts due from Rangeview Metropolitan District and Sky
Ranch Metropolitan District #5;
●
estimated property taxes;
●
utilization of net operating losses;
●
capital expenditures for investing in expenses and assets of the
District;
●
the impact of water quality, solid waste disposal and environmental
regulations on our financial condition and results of
operations;
●
environmental clean-up at the Lowry Range by the U.S. Army Corps of
Engineers;
●
our ability to comply with permit requirements and environmental
regulations and the cost of such compliance;
●
our ability to meet customer demands in a sustainable and
environmentally friendly way;
●
the recoverability of construction and acquisition costs from
rates;
●
our belief that we are not a public utility under Colorado
law;
●
our belief that we are not an investment company under the
Investment Company Act of 1940, as amended;
●
impairments in carrying amounts of long-lived assets;
●
changes in unrecognized tax positions;
●
plans to retain earnings and not pay dividends;
●
forfeitures of option grants, vesting of non-vested options and the
fair value of option awards;
●
the effectiveness of our disclosure controls and procedures and our
internal controls over financial reporting;
●
accounting estimates and the impact of new accounting
pronouncements;
●
future fluctuations in the price and trading volume of our common
stock; and
●
timing of the filing of our proxy statement.
Forward-looking statements reflect our
current views with respect to future events and are subject to
certain risks, uncertainties and assumptions.
We cannot
assure you that any of our expectations will be realized.
Our actual results could differ
materially from those in such statements. Factors that could cause
actual results to differ from those contemplated by such
forward-looking statements include, without
limitation:
●
the timing of new home construction and other development in the
areas where we may sell our water, which in turn may be impacted by
credit availability;
●
population growth;
●
employment rates;
●
timing of oil and gas development in the areas where we sell our
water;
●
general economic conditions;
●
the market price of water;
●
the market price of oil and gas;
●
changes in customer consumption patterns;
●
changes in applicable statutory and regulatory
requirements;
●
changes in governmental policies and procedures;
●
changes in interest rates;
●
uncertainties in the estimation of water available under
decrees;
●
uncertainties in the estimation of costs of delivery of water and
treatment of wastewater;
●
uncertainties in the estimation of the service life of our
systems;
●
uncertainties in the estimation of costs of construction
projects;
●
the strength and financial resources of our
competitors;
●
our ability to find and retain skilled personnel;
●
climatic and weather conditions, including floods, droughts and
freezing conditions;
●
labor relations;
●
turnover of elected and appointed officials and delays caused by
political concerns and government procedures;
2
●
availability and cost of labor, material and
equipment;
●
delays in anticipated permit and construction dates;
●
engineering and geological problems;
●
environmental risks and regulations;
●
our ability to raise capital;
●
our ability to negotiate contracts with new customers;
●
uncertainties in water court rulings; and
●
the factors described under “Risk Factors” in this
Annual Report on Form 10-K.
We undertake no obligation, and disclaim any obligation, to
publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. All
forward-looking statements are expressly qualified by this
cautionary statement.
Pure Cycle Corporation (“we,” “us” or
“our”) is a Colorado corporation that provides
wholesale water and wastewater services. The wholesale water and
wastewater services may include, but are not limited to, 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
provide these services to our wholesale customers, which are
typically industrial customers and local governmental entities that
provide water and wastewater services to their end-use customers
located in the greater Denver, Colorado metropolitan
area.
We are a vertically integrated water company, 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 and
irrigation water to our wholesale customers (we own surface water,
groundwater, reclaimed water rights and water 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 currently provide wholesale water service predominantly to two
local governmental entity customers. Our largest customer is the
Rangeview Metropolitan District (the “District”), a
quasi-municipal political subdivision of the State of Colorado
which is described further below. We provide service to the
District and its end-use customers pursuant to the “Rangeview
Water Agreements” (defined below) between us and the District
for the provision of wholesale water service to the District for
use in the District’s service area. Through the District, we
provide wholesale service to 258 Single Family Equivalent
(“SFE”) (defined below) water connections and 157 SFE
wastewater connections located in southeastern metropolitan Denver.
In the past three years, we have been providing untreated water to
industrial customers in our service areas and adjacent to our
service areas to the oil and gas industry 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 in the past has led to
increased water demands. As a result of decreased oil prices, oil
and gas operators have curtailed their drilling since
2014.
We plan to utilize our significant water
assets along with our adjudicated reservoir sites, which are
described in the
Our Water and Land
Assets
section below, to
provide wholesale water and wastewater services to local
governmental entities. These local governmental entities will in
turn provide residential and commercial water and wastewater
services to communities along the eastern slope of Colorado in the
area extending essentially from Fort Collins on the north to
Colorado Springs on the south which is generally referred to as the
“Front Range.” Principally we are targeting the
“I-70 corridor” which is located east of downtown
Denver and south of Denver International Airport along Interstate
70. This area is predominately undeveloped and is expected to
experience substantial growth over the next 30
years.
We also own 931 acres of land in the I-70
corridor known as Sky Ranch, which we are planning for development.
Sky Ranch is described in the
Our Water and Land
Assets
section
below.
Pure Cycle Corporation was incorporated in Delaware in 1976 and
reincorporated in Colorado in 2008.
3
Glossary of terms
The following terms are commonly used in the water industry and are
used throughout our annual report:
●
Acre Foot – approximately 326,000 gallons of water, or enough
water to cover an acre of ground with one foot of water. For some
instances herein, as context dictates, the term acre feet is used
to designate an annual decreed amount of water available during a
typical year.
●
Customer Facilities – facilities that carry potable
water and reclaimed water to customers from the retail water
distribution system (see “Retail Facilities” below) and
collect wastewater from customers and transfer it to the retail
wastewater collection system. Water and wastewater service lines,
interior plumbing, meters and other components are typical examples
of Customer Facilities. In many cases, portions of the Customer
Facilities are constructed by the developer. Customer Facilities
are typically owned and maintained by the customer.
●
Non-Tributary Groundwater – underground water in an
aquifer that is situated so it neither draws from nor contributes
to a natural surface stream in any measurable degree.
●
Not Non-Tributary Groundwater – statutorily defined as
groundwater located within those portions of the Dawson, Denver,
Arapahoe, and Laramie-Fox hills aquifers that are outside of any
designated groundwater basin in existence on January 1,
1985.
●
Retail Facilities – facilities that distribute water to
and collect wastewater from an individual subdivision or community.
Developers are typically responsible for the funding and
construction of Retail Facilities. Once we certify that the Retail
Facilities have been constructed in accordance with our design
criteria, the developer dedicates the Retail Facilities to a
quasi-municipal political subdivision of the state, and we operate
and maintain the facilities on behalf of such political
subdivision.
●
Section – a parcel of land equal to one square mile and
containing 640 acres.
●
Single Family Equivalent unit (“SFE”) – One
SFE is a customer – whether residential, commercial or
industrial – that imparts a demand on our water or
wastewater systems similar to the demand of a family of four
persons living in a single family house on a standard sized lot.
One SFE is assumed to have a water demand of approximately 0.4 acre
feet per year and to contribute wastewater flows of approximately
300 gallons per day.
●
Special Facilities – facilities that are required to
extend services to an individual development and are not otherwise
classified as a typical “Wholesale Facility” or
“Retail Facility.” Temporary infrastructure required
prior to construction of permanent water and wastewater systems or
transmission pipelines to transfer water from one location to
another are examples of Special Facilities. We typically design and
construct the Special Facilities using funds provided by the
developer in addition to the normal rates, fees and charges that we
collect from our customers. We are typically responsible for the
operation and maintenance of the Special Facilities upon
completion.
●
Tributary Groundwater – all water located in an aquifer
that is hydrologically connected to a natural stream such that
depletion has an impact on the surface stream.
●
Tributary Surface Water – water on the surface of the ground
flowing in a stream or river system.
●
Wholesale Facilities – facilities that serve an entire
service area or major regions or portions thereof. Wells, treatment
plants, pump stations, tanks, reservoirs, transmission pipelines,
and major sewage lift stations are typical examples of Wholesale
Facilities. We own, design, construct, operate, maintain and repair
Wholesale Facilities which are typically funded using rates, fees
and charges that we collect from our customers.
4
Our Water and Land Assets
This section should be read in conjunction
with
Item 1A –
Risk Factors, Item 7 – Management’s Discussion and
Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Use of
Estimates
, and Note 4
–
Water and Land
Assets
.
The $28.3 million of capitalized water costs on our balance sheet
represents the costs of the water rights we own or have the
exclusive right to use and the related infrastructure developed to
provide wholesale water and wastewater services. Our water assets
are as follows:
|
Table A - Water Assets
|
|
|
Water Source
|
Groundwater (acre feet)
|
|
Lowry (Rangeview Water Supply)
|
|
|
Export (1)
|
11,650
|
|
Non-Export (1)
|
12,035
|
|
Fairgrounds
|
321
|
|
Sky Ranch
|
828
|
|
|
24,834
|
|
|
|
|
|
Surface Water (acre feet)
|
|
Lowry (1)
|
3,300
|
|
WISE
|
500
|
|
|
3,800
|
|
|
|
|
Total (Groundwater and Surface Water)
|
28,634
|
|
|
|
|
(1) The combined Lowry water rights are 26,985.
|
|
We believe we can serve approximately 60,000 SFEs.
Our service areas and water and land assets are described in
greater detail in the maps and discussion that
follows:
5
The map below indicates the location of our Denver area
assets.
6
Rangeview Water Supply and the Lowry Range
Our
Rangeview Water –
We own or control a total of approximately
3,300 acre feet of tributary surface water, 23,685 acre feet of
non-tributary and not non-tributary groundwater rights, and
approximately 26,000 acre feet of adjudicated reservoir sites that
we refer to as our “Rangeview Water Supply.” This water
is located in the southeast Denver metropolitan area at the
“Lowry Range,” which is owned by the State Board of
Land Commissioners (the “Land Board”) and is described
below.
We acquired our Rangeview Water Supply in April 1996 pursuant to
the following agreements:
(i)
The 1996 Amended and Restated Lease Agreement between the Land
Board and the District which was superseded by the 2014 Amended and
Restated Lease Agreement, dated July 10, 2014 (the
“Lease”), among the Land Board, the District, and
us;
(ii)
The Agreement for Sale of non-tributary and not non-tributary
groundwater which we can “export” from the Lowry Range
to supply water to nearby communities (this portion of the
Rangeview Water Supply is referred to as our “Export
Water”) between us and the District (the “Export
Agreement”); and
(iii)
The 1996 Service Agreement between us and the District for the
provision of water service to the District’s customers, which
was superseded by the Amended and Restated Service Agreement, dated
July 11, 2014 (the “Service Agreement”), between us and
the District.
Additionally, in 1997 we entered into a Wastewater Service
Agreement (the “Wastewater Agreement”) with the
District to provide wastewater service to the District’s
customers.
The Lease, the Export Agreement, the Service Agreement, and the
Wastewater Agreement are collectively referred to as the
“Rangeview Water Agreements.”
Pursuant to the Rangeview Water Agreements, we design, construct,
operate and maintain the District’s water and wastewater
systems to allow the District to provide water and wastewater
service to its customers located within the District’s 24,000
acre service area at the Lowry Range. Subject to the terms and
conditions of the Lease, we are the exclusive water and wastewater
provider on the Lowry Range, and we operate both the water and the
wastewater systems during our contract period on behalf of the
District, which owns the facilities for both systems. At the
expiration of our contract term in 2081, ownership of the water
system facilities located on the Lowry Range used to deliver
Non-Export Water to customers will revert to the Land Board, with
the District retaining ownership of the wastewater facilities.
Through facilities we own, we use our Export Water, and we intend
to use other supplies owned by us, to provide wholesale water
service and wastewater service to customers located outside of the
Lowry Range, including customers of the District and other
governmental entities and industrial and commercial
customers.
Of the approximately 26,985 acre feet of water comprising our
Rangeview Water Supply, we own 11,650 acre feet of Export Water,
which consists of 10,000 acre feet of groundwater and 1,650 acre
feet of average yield surface water, pending completion by the Land
Board of documentation related to the exercise of our right to
substitute 1,650 acre feet of our groundwater for a comparable
amount of surface water. Additionally, assuming the completion of
the substitution of groundwater for surface water, we hold the
exclusive right to develop and deliver through the year 2081 the
remaining 12,035 acre feet of groundwater and approximately 1,650
acre feet of average yield surface water to customers either on or
off of the Lowry Range.
The
Lowry Range Property –
The Lowry Range is located in unincorporated
Arapahoe County, about 20 miles southeast of downtown Denver. The
Lowry Range is one of the largest contiguous parcels under
single ownership next to a major metropolitan area in the
United States. The Lowry Range is approximately 27,000 acres
in size or about 40 square miles of land. Of the 27,000 acres,
pursuant to our agreements with the Land Board and the District, we
have the exclusive rights to provide water and wastewater services
to approximately 24,000 acres of the Lowry
Range.
Rangeview
Metropolitan District –
The District is a quasi-municipal
corporation and political subdivision of Colorado formed in 1986
for the purpose of providing water and wastewater service to the
Lowry Range and other approved areas. The District is governed by
an elected board of directors. Eligible voters and persons eligible
to serve as directors of the District must own an interest in
property within the boundaries of the District. We own certain
rights and real property interests which encompass the current
boundaries of the District. The current directors of the District
are Mark W. Harding, Scott E. Lehman, and David A. Garin (all are
employees of Pure Cycle), and two independent board members.
Pursuant to Colorado law, directors may receive $100 for each board
meeting they attend, up to a maximum of $1,600 per year. Mr.
Harding, Mr. Lehman, and Mr. Garin have all elected to forego these
payments.
7
South
Metropolitan Water Supply Authority (“SMWSA”) and Water
Infrastructure Supply Efficiency Partnership (“WISE”)
–
SMWSA is a
municipal water authority in the State of Colorado organized to
pursue the acquisition and development of new water supplies on
behalf of its members, including the District. SMWSA members
include 14 Denver area water providers in Arapahoe and Douglas
Counties. The District became a member of SMWSA in 2009 in an
effort to participate with other area water providers in developing
regional water supplies along the Front Range. We entered into a
Participation Agreement with the District on December 16,
2009, whereby we agreed to provide funding to the District in
connection with its membership in the SMWSA (the “SMWSA
Participation Agreement”). SMWSA members have been working
with the City and County of Denver acting through its Board of
Water Commissioners (“Denver Water”) and the City of
Aurora acting by and through its Utility Enterprise (“Aurora
Water”) on a cooperative water project known as the WISE,
which seeks to develop regional infrastructure that would
interconnect members’ water transmission systems to be able
to develop additional water supplies from the South Platte River in
conjunction with Denver Water and Aurora Water. In July 2013, the
District together with nine other SMWSA members formed the South
Metro WISE Authority (“SMWA”) pursuant to the South
Metro WISE Authority Formation and Organizational Intergovernmental
Agreement (the “SM IGA”) to enable its members to
participate in WISE. The SM IGA specifies each member’s pro
rata share of WISE and the members’ rights and obligations
with respect to WISE. On December 31, 2013, SMWA, Denver Water
and Aurora Water entered into the Amended and Restated WISE
Partnership – Water Delivery Agreement (the “WISE
Partnership Agreement”), which provides for the purchase and
construction of certain infrastructure (pipelines, water storage
facilities, water treatment facilities, and other appurtenant
facilities) to deliver water to and among the 10 members of the
SMWA, Denver Water and Aurora Water. We have entered into the
Rangeview/Pure Cycle WISE Project Financing Agreement with the
District dated November 19, 2014 (effective as of December 22,
2014), which obligates us to fund the District’s cost of
participating in WISE (the “WISE Financing Agreement”).
In exchange for funding the District’s obligations in WISE,
we will have the sole right to use and reuse the District’s
approximate 7% share of the WISE water and infrastructure to
provide water service to the District’s customers and to
receive the revenue from such service. Upon completion of the WISE
infrastructure in 2017, we will be entitled to approximately
three million gallons per day of transmission pipeline
capacity and 500 acre feet per year of water.
In accordance
with the WISE Financing Agreement and the SMWSA Participation
Agreement, to date we have provided approximately $2.9 million of
financing to the District to fund its obligation to finance the
purchase of infrastructure for WISE, its obligations related to
SMWSA, and the construction of a connection to the WISE
system.
We anticipate
that we will be spending the following over the next five fiscal
years to fund the District’s purchase of its share of the
water transmission line and additional facilities, water and
related assets for WISE and to fund operations and water deliveries
related to WISE:
|
Table B - Estimated WISE Costs
|
|||||
|
|
For the Fiscal Years Ended August 31,
|
||||
|
|
2017
|
2018
|
2019
|
2020
|
2021
|
|
Operations
|
$
96,600
|
$
96,600
|
$
96,600
|
$
96,600
|
$
96,600
|
|
Water Delivery
|
45,000
|
225,000
|
495,000
|
675,000
|
855,000
|
|
Capital
|
464,000
|
339,000
|
464,000
|
1,339,200
|
57,100
|
|
Other
|
43,500
|
23,600
|
86,600
|
23,600
|
23,600
|
|
|
$
649,100
|
$
684,200
|
$
1,142,200
|
$
2,134,400
|
$
1,032,300
|
Land
Board Royalties –
Pursuant to the Rangeview Water Agreements,
the Land Board is entitled to royalty payments based on a
percentage of revenues earned from water sales that utilize water
from the Rangeview Water Supply. The calculation of royalties
depends on the water source and whether the customer is a public or
private entity. Royalties were modified in July 2014 pursuant to
the terms of the Lease. The Land Board does not receive a royalty
from wastewater services.
Water
Customers
–
When we develop, operate and
deliver water service, payments from customers generate royalties
to the Land Board at a rate of 12% of gross revenues from private
customers and 10%
8
from public entity customers. In the event
that either (i) metered production of water used on the Lowry Range
in any calendar year exceeds 13,000 acre feet or (ii) 10,000
surface acres on the Lowry Range have been rezoned to
non-agricultural use, finally platted and water tap agreements have
been entered into with respect to all improvements to be
constructed on such acreage, the Land Board may elect, at its
option, to receive, in lieu of its royalty of 10% or 12% of gross
revenues (depending on whether the customer is public or private),
50% of the collective net profits (ours and the District’s)
derived from the sale or other disposition of water on the Lowry
Range. To date neither of these conditions has been met, and such
conditions are not likely to be met any time soon. In addition to
royalties on the sale of metered water deliveries, the Land Board
will receive a royalty on the sale of water taps at the rate of two
percent, except for the sale of any taps to Sky Ranch, of the gross
amount received from the sale of a water tap.
Sale of Water
Rights
–
In the event we sell our Export
Water right outright rather than developing and delivering water
service, royalties to the Land Board escalate based on the amount
of gross revenue we receive and are lower for sales to a water
district or similar municipal or public entity than for sales to a
private entity as noted in Table C.
|
|
Table C- Royalties for Sale of Export Water Rights
|
|||
|
|
|
Royalty Rate
|
||
|
Gross Revenues
|
|
Private Entity Buyer
|
|
Public Entity Buyer
|
|
$
0 - $45,000,000
|
|
12
%
|
|
10
%
|
|
$
45,000,001 - $60,000,000
|
|
24
%
|
|
20
%
|
|
$
60,000,001 – $75,000,000
|
|
36
%
|
|
30
%
|
|
$
75,000,001 - $90,000,000
|
|
48
%
|
|
40
%
|
|
Over $90,000,000
|
|
50
%
|
|
50
%
|
We are also required to pay the Land Board a minimum annual water
production fee, which is currently under negotiation, but we have
estimated the minimum fee to be approximately $45,600 per year,
which is to be credited against future royalties.
East Cherry Creek Valley System –
Pursuant to a 1982 contractual right, the
District may purchase water produced from East Cherry Creek Valley
Water and Sanitation District’s (“ECCV”) Land
Board system. ECCV’s Land Board system is comprised of eight
wells and more than 10 miles of buried water pipeline located on
the Lowry Range. In May 2012, in order to increase the delivery
capacity and reliability of these wells, in our capacity as the
District’s service provider and the Export Water Contractor
(as defined in the Lease among us, the District and the Land
Board), we entered into an agreement to operate and maintain the
ECCV facilities allowing us to utilize the system to provide water
to commercial and industrial customers, including customers
providing water for drilling and hydraulic fracturing of oil and
gas wells.
Our costs
associated with the use of the ECCV system are a flat monthly fee
of $8,000 per month from January 1, 2013 through December 31, 2020,
and will decrease to $3,000 per month from January 1, 2021 through
April 2032. Additionally, we pay a fee per 1,000 gallons of water
produced from ECCV’s system, which is included in the water
usage fees charged to customers.
Hydraulic
Fracturing –
Water
revenues from sales of water for the development of well sites and
for drilling and fracking wells drilled into the Niobrara Formation
were approximately $600 and $782,700 during the fiscal years ended
August 31, 2016 and 2015, respectively. With a large percentage of
the acreage surrounding the Lowry Range in Arapahoe, Adams, Elbert,
and portions of Douglas Counties already leased by major oil
companies, we anticipate providing additional water for drilling
and hydraulic fracturing (“fracking”) of oil and gas
wells in the future. Through March 2015, we sold untreated water
directly to ConocoPhillips Company (“ConocoPhillips”),
the largest oil and gas lease holder operating in the area, and
indirectly to ConocoPhillips through Select Energy Services, LLC
(“Select”). As a result of low oil prices, drilling in
our service has been curtailed and sales have been limited during
the current fiscal year.
9
Arapahoe County Fairgrounds Agreement for Water
Service
In 2005, we entered into an Agreement for
Water Service (the “County Agreement”) with Arapahoe
County to design, construct, operate and maintain a water system
for, and provide water services to, the county for use at the
Arapahoe County fairgrounds (the “Fairgrounds”), which
are located west of the Lowry Range. Pursuant to the County
Agreement, we purchased 321 acre feet of water from the county in
2008. Further details of the arrangements with the county are
described in Note 4 –
Water and Land
Assets
to the
accompanying financial statements.
Pursuant to the County Agreement, we constructed and own a deep
water well, a 500,000-gallon water tank and pipelines to transport
water to the Fairgrounds. The construction of these items was
completed in our fiscal 2006, and we began providing water service
to the county in 2006.
Sky Ranch
In 2010, we purchased approximately 931 acres of undeveloped land
located in unincorporated Arapahoe County known as Sky Ranch. Sky
Ranch is located directly adjacent to I-70, 16 miles east of
downtown Denver, four miles north of the Lowry Range, and four
miles south of Denver International Airport.
The property includes rights to approximately 830 acre feet of
water and approximately 640 acres of oil and gas mineral rights and
has been zoned for residential, commercial and retail uses that may
include up to 4,850 SFEs. Sky Ranch is zoned for 4,400 homes and
1.35 million square feet of commercial and retail property. There
is currently no development at Sky Ranch. We currently lease the
land to an area farmer and have leased the minerals to
ConocoPhillips. We envision that when development at Sky Ranch
begins, the development will be in the form of entry-level housing
(houses costing in the $300,000 range).
We are currently working on plans to develop the first phase of Sky
Ranch which will include 151 acres. The plan for the first phase of
the development will include 502 units but, depending on lot size
and configuration, may be increased to 525 units.
10
We plan to provide wholesale and wastewater services to one or more
Sky Ranch metropolitan districts (the “Sky Ranch
District”) that will in turn provide retail water and
wastewater services to the Sky Ranch District residents and
businesses. We anticipate we will need to construct infrastructure
such as roads, curbs and gutters, and the necessary water and
wastewater systems; however, we are in discussions with a number of
developers and builders to determine how this infrastructure will
be phased and financed. Our plan is to provide the market with
competitively priced lots that are ready for development, together
with affordable, sustainable, environmentally sound water and
wastewater services. We currently anticipate development will begin
in the second half of calendar 2017 subject to us obtaining the
necessary approvals and the timing of the final design. We
anticipate the development of the first phase to occur over a
number of sub-phases with multiple builders, and we are targeting
approximately 100 lots per year being developed. At full
development, the water and wastewater utilities at Sky Ranch are
anticipated to generate in excess of $145 million in tap fee
revenue and approximately $7.5 million annually in wholesale water
and wastewater service fee revenue (based on current fees and
charges).
Oil
and Gas Lease –
On
March 10, 2011, we entered into a Paid-Up Oil and Gas Lease
(the “O&G Lease”) and 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. The O&G Lease seeks
to capitalize on the growing interest in the region’s
Niobrara Oil Formation. Pursuant to the O&G Lease, we received
an up-front payment of $1,900 per net mineral leased acre, or
$1,243,400, and 20% of gross proceeds royalty (less certain taxes)
from the sale of any oil and gas produced from our property. In
December 2012, the O&G Lease was purchased by a wholly owned
subsidiary of ConocoPhillips. The O&G Lease had a term of three
(3) years commencing on March 10, 2011. The lease was
extended for an additional two (2) years, and we received an
additional up-front payment of $1,243,400 for the extension. The
O&G Lease is now held by production entitling us to
royalties
11
instead of renewal payments. Pursuant to the
Surface Use Agreement, ConocoPhillips may drill on up to three well
pad sites on the Sky Ranch property covered under the O&G
Lease. Additionally, we will receive $3,000 per acre for land that
is permanently disturbed for use in the exploration and production
of oil and gas. During fiscal 2015, two wells were drilled within
our mineral interest. Beginning in March 2015, both wells were
placed into service and began producing oil and gas and accruing
royalties to us. In May 2015, certain gas collection infrastructure
was extended to the property to allow the collection of gas from
the wells and accrual of royalties attributable to gas production.
During the fiscal year ended August 31, 2016, we received $343,600
in royalties attributable to these two wells.
In the past, we experienced water demands for hydraulic fracturing
of oil and gas wells being developed in the Niobrara Formation
around our Sky Ranch property and the Land Board’s Lowry
Range property. These demands have been curtailed by the decline in
oil prices. The wells developed in the Niobrara Formation that we
have served were utilizing between seven and 12 million gallons of
water to drill and frack, which equates to selling water to between
approximately 53 and 92 SFEs for an entire year.
Arkansas River Land
During the fiscal quarter ended November 30, 2015, we purchased
three farms totaling 700 acres for approximately $450,300. 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. We intend to sell the farms within the next
fiscal year. We also own approximately 13,900 acres of mineral
interests in the Arkansas River Valley, which have an estimated
value of approximately $1.4 million. We currently have no plans to
sell our mineral interests.
Well Enhancement and Recovery Systems
In January 2007, we, along with two other parties, formed Well
Enhancement and Recovery Systems LLC (“Well Enhancement
LLC”), to develop a new deep water well enhancement tool and
process that we believe will increase the efficiency of wells
completed into the Denver Basin groundwater formations. In fiscal
2008, the well enhancement tool and process was completed and
tested on two deep water wells developed by an area water provider
with favorable results. According to results from studies performed
by an independent hydro-geologist, the well enhancement tool
effectively increased the production of the two test wells by 80%
and 83% when compared to that of nearby wells developed in similar
formations at similar depths. Based on the positive results of the
test wells, we continue to refine the process of enhancing deep
water wells and are marketing the tool to area water providers. On
April 27, 2010, we and the other remaining owner of Well
Enhancement LLC acquired the third partner’s one-third
interest in Well Enhancement LLC. Following the acquisition, the
remaining partners each hold a 50% interest in Well Enhancement
LLC. We used our tool on one well during fiscal 2014. We did not
use our tool during either fiscal 2015 or fiscal 2016.
Revenues
We generate revenues through our wholesale water and wastewater
segment predominately from three sources: (i) monthly service and
contract delivery fees, (ii) one-time water and wastewater tap fees
and construction fees, and (iii) consulting fees. Our revenue
sources and how we account for them are described in greater detail
below. We typically negotiate the payment terms for tap fees,
construction fees, and other water and wastewater service fees with
our wholesale customers as a component of our service agreements
prior to construction of the project. However, with respect to
customers on the Lowry Range, pursuant to the Lease, the
District’s rates and charges to such end-use customers may
not exceed the average of similar rates and charges of three nearby
water providers.
i.
Monthly Service
Fees
–
Monthly wholesale water usage
fees are assessed to our customers based on actual metered
deliveries to their end-use customers each month. Water usage fees
are based on a tiered pricing structure that provides for higher
prices as customers use greater amounts of water. The water usage
fees for end-use customers on the Lowry Range are noted below in
Table D:
12
|
Table D - Tiered Water Usage Pricing Structure
|
|||
|
|
Price ($ per thousand gallons)
|
||
|
Amount of consumption
|
2016
|
2015
|
2014
|
|
Base charge per SFE
|
$
30.35
|
$
30.35
|
$
30.35
|
|
0 gallons to 10,000 gallons
|
$
3.51
|
$
3.51
|
$
3.51
|
|
10,001 gallons to 20,000 gallons
|
$
5.31
|
$
5.31
|
$
5.31
|
|
20,001 gallons to 40,000 gallons
|
$
8.12
|
$
8.12
|
$
8.12
|
|
40,001 gallons and above
|
$
9.55
|
$
9.55
|
$
9.55
|
The figures in Table D reflect the amounts
charged to the District’s end-use customers. In exchange for
providing water service to the District’s Lowry Range
customers, we receive 98% of the usage charges received by the
District relating to water services after deducting the required
royalty to the Land Board (described above at Rangeview Water
Supply and Lowry Range –
Land Board
Royalties
). In exchange
for providing wastewater services, we receive 90% of the
District’s monthly wastewater service fees, as well as the
right to use or sell the reclaimed water.
The District’s 2016 rates and charges for wastewater service
are based on a monthly fee of $10.05 per SFE plus a $7.40 per
thousand gallons treated usage fee.
In addition to the tiered water usage pricing structure, we
currently charge a hydrant rate of $10.50 per thousand gallons for
commercial and industrial customers. We also collect other
immaterial fees and charges from customers and other users to cover
miscellaneous administrative and service expenses, such as
application fees, review fees and permit fees.
ii.
Water and
Wastewater Tap Fees and Construction Fees
–
Tap
fees are typically paid by developers in advance of construction
activities and are non-refundable. Tap fees are typically used to
fund construction of the Wholesale Facilities and defray the
acquisition costs of obtaining water rights.
The District’s 2016 water tap fees are $24,620, and its
wastewater tap fees are $4,988.
In exchange for providing water service to the District’s
customers on the Lowry Range, we receive 100% of the
District’s tap fees after deducting the required two percent
royalty to the Land Board described above. In exchange for
providing wastewater services, we receive 100% of the
District’s wastewater tap fees.
Construction fees are fees we receive, typically in advance, from
developers for us to build certain infrastructure such as Special
Facilities which are normally the responsibility of the
developer.
iii.
Consulting
Fees
– Consulting
fees are fees we receive, typically on a monthly basis, from
municipalities and area water providers along the I-70 corridor,
for systems with respect to which we provide contract operations
services.
Significant Customers
Our wholesale water and wastewater sales to the District pursuant
to the Rangeview Water Agreements accounted for 67%, 19% and 9% of
our total water revenues for the fiscal years ended August 31,
2016, 2015 and 2014, respectively. The District has one significant
customer, the Ridgeview Youth Services Center
(“Ridgeview”). Pursuant to our Rangeview Water
Agreements with the District, we are providing water to Ridgeview
on behalf of the District. Ridgeview accounted for 55%, 16% and 7%
of our total water revenues for the fiscal years ended August 31,
2016, 2015 and 2014, respectively.
Our industrial water sales directly and
indirectly to ConocoPhillips accounted for approximately less than
1%,
75% and 88% of our total water revenues for
the fiscal years ended August 31, 2016, 2015 and 2014,
respectively.
13
Our Projected Operations
This section should be read in conjunction
with
Item 1A –
Risk Factors
.
Along the Colorado Front Range, there are over 70 water providers
with varying needs for replacement and new water supplies. We
believe we are well positioned to assist certain of these providers
in meeting their current and future water needs.
We design, construct and operate our water and wastewater
facilities using advanced water purification and wastewater
treatment technologies which allow us to use our water supplies in
an efficient and environmentally sustainable manner. We plan to
develop our water and wastewater systems in stages to efficiently
meet demands in our service areas, thereby reducing the amount of
up-front capital costs required for construction of facilities. We
use third-party contractors to construct our facilities as needed.
We employ licensed water and wastewater operators to operate our
water and wastewater systems. As our systems expand, we expect to
hire additional personnel to operate our systems, which include
water production, treatment, testing, storage, distribution,
metering, billing, and operations management.
Our water and wastewater systems conjunctively use surface and
groundwater supplies and storage of raw water and highly treated
effluent supplies to provide a balanced sustainable water supply
for our wholesale customers and their end-use customers.
Integrating conservation practices and incentives together with
effective water reuse demonstrates our commitment to providing
environmentally responsible, sustainable water and wastewater
services. Water supplies and water storage reservoirs are
competitively sought throughout the west and along the Front Range
of Colorado. We believe regional cooperation among area water
providers in developing new water supplies, water storage, and
transmission and distribution systems provides the most cost
effective way of expanding and enhancing service capacities for
area water providers. We continue to discuss developing water
supplies and water storage opportunities with area water
providers.
We expect the development of our Rangeview Water Supply to require
a significant number of high capacity deep water wells. We
anticipate drilling separate wells into each of the three principal
aquifers located beneath the Lowry Range. Each well is intended to
deliver water to central water treatment facilities for treatment
prior to delivery to customers. Development of our Lowry Range
surface water supplies will require facilities to divert surface
water to storage reservoirs to be located on the Lowry Range and
treatment facilities to treat the water prior to introduction into
our distribution systems. Surface water diversion facilities will
be designed with capacities to divert the surface water when
available (particularly during seasonal events such as spring
run-off and summer storms) for storage in reservoirs to be
constructed on the Lowry Range. Based on preliminary engineering
estimates, the full build-out of water facilities (including
diversion structures, transmission pipelines, reservoirs, and water
treatment facilities) on the Lowry Range will cost in excess of
$340 million, based on estimated costs, and will accommodate water
service to customers located on and outside the Lowry Range. We
expect this build out to occur in phases over an extended period of
time, and we expect that tap fees will be sufficient to fund the
infrastructure costs.
Our Denver-based supplies are a valuable, locally available
resource located near the point of use. This enables us to
incrementally develop infrastructure to produce, treat and deliver
water to customers based on their growing demands.
During fiscal 2016, we, along with the District, invested
approximately $368,600 to construct an effluent storage pond on the
Lowry Range. We anticipate during fiscal 2017 that we will invest
between $4.5 million to $5 million to construct pipelines that will
interconnect the Rangeview, WISE, and Sky Ranch water systems. We
also anticipate investing in pipelines at the Sky Ranch property in
anticipation of the development of the first phase of the property.
We also expect to add additional wells as demand
grows.
The District is a participant in the WISE project. This project is
developing infrastructure to interconnect providers’ water
systems and to extend renewable water sources owned by Denver Water
and Aurora Water to participating South Metro water providers,
including the District and, through our agreements with the
District, us. This system will diversify our sources of water and
will enable providers to move water among themselves, which will
increase the reliability of our and others’ water systems.
Through the WISE Financing Agreement, we funded the
District’s purchase of certain rights to use existing water
transmission and related infrastructure acquired and constructed
by
14
the WISE project. We invested approximately $113,600 in the WISE
system during fiscal 2016 and have invested approximately $2.9
million to date. We anticipate that we will be spending
approximately $650,000 on this system during fiscal 2017 and $5
million during the next four years to fund the District’s
purchase of its share of the water transmission line and additional
facilities, water and related assets for WISE and to fund
operations and water deliveries related to WISE. Timing of the
investment will vary depending on the schedule of projects within
WISE.
We are in the process of planning development of our Sky Ranch
property, including evaluating possible joint venture opportunities
pursuant to which we would build the water and wastewater
infrastructure for housing and commercial development of the
property. We currently anticipate the first phase of development
will begin in the second half of calendar 2017, subject to
obtaining approvals and the timing of the final design. The timing
for us to develop the remaining phases of the property will be
largely dependent on the Denver real estate market and the interest
we receive from home builders and developers. During fiscal 2016 we
invested approximately $285,600 in our Sky Ranch property, which
consisted of development planning, preliminary design, and related
filing fees.
We plan to develop additional water assets within the Denver area
and are exploring opportunities to utilize our water assets in
areas adjacent to our existing water supplies.
Water and Growth in Colorado
After experiencing a weak economy through 2012, much like that of
the U.S. as a whole, Colorado began recovering during 2013 and 2014
and continued to improve during 2015 and 2016. The key drivers in
our business model are:
●
Housing
Starts
–
From September 2015 to September
2016, annual housing starts increased by 24%. From September 2014
to September 2015, annual housing starts increased by
18%.
●
Unemployment
–
The unemployment
rate in Colorado was 3.8% at August 31, 2016, compared to a
national unemployment rate of 4.9%. Colorado added an estimated
71,600 jobs from August 2015 to August 2016.
●
Population
–
The Denver
Regional Council of Governments (“DRCOG”), a voluntary
association of over 50 county and municipal governments in the
Denver metropolitan area, estimates that the Denver metropolitan
area population will increase by about 38% from today’s 3.4
million people to 4.7 million people by the year 2040. A Statewide
Water Supply Initiative report by the Colorado Water Conservation
Board estimates that the South Platte River basin, which includes
the Denver metropolitan region, will grow from a current population
of 3.9 million to 4.9 million by the year 2030, while the
state’s population will increase from 5.7 million to 7.2
million.
●
Demand
–
Approximately 70%
of the state’s projected population increase is anticipated
to occur within the South Platte River basin. Significant increases
in Colorado’s population, particularly in the Denver metro
region and other areas in the water-short South Platte River basin,
together with increasing agricultural, recreational, and
environmental water demands, will intensify competition for water
supplies. The estimated population increases are expected to result
in demands for water services in excess of the current capabilities
of municipal service providers, especially during drought
conditions.
●
Supply
–
The Statewide
Water Supply Initiative estimates that population growth in the
Denver region and the South Platte River basin could result in
additional water supply demands of over 400,000 acre feet by the
year 2030.
●
Development
–
Colorado law
requires property developers to demonstrate that they have
sufficient water supplies for their proposed projects before
rezoning applications will be considered. These factors indicate
that water and availability of water will continue to be critical
to growth prospects for the region and the state, and that
competition for available sources of water will continue to
intensify. We focus the marketing of our water supplies and
services to developers and home builders that are active along the
Colorado Front Range as well as other area water providers in need
of additional supplies.
Colorado’s future water supply needs will be met through
conservation, reuse and the development of new supplies. The
District’s rules and regulations for water and wastewater
service call for adherence to strict conservation measures,
including low-flow water fixtures, high efficiency appliances, and
advanced irrigation control devices. Additionally, our systems are
designed and constructed using a dual-pipe water distribution
system to segregate the delivery of high quality potable drinking
water to our local governmental entities and their end-use
customers through one system and a second system to supply raw or
reclaimed water for irrigation demands. About one-half
of
15
the water used by a typical Denver-area residential water customer
is used for outdoor landscape and lawn irrigation. We believe that
raw or reclaimed water supplies provide the lowest cost, most
environmentally sustainable water for outdoor irrigation. We expect
our systems to include an extensive water reclamation system in
which essentially all effluent water from wastewater treatment
plants will be reused to meet non-potable water demands. Our
dual-distribution systems demonstrate our commitment to
environmentally responsible water management policies in our water
short region.
Competition
We negotiate individual service agreements with our governmental
customers and with their developers and/or home builders to design,
construct and operate water and wastewater systems and to provide
services to end-use customers of governmental entities and to
commercial and industrial customers. These service agreements seek
to address all aspects of the development of the water and
wastewater systems including:
(i)
the purchase of water and wastewater taps in exchange for our
obligation to construct certain Wholesale Facilities;
(ii)
the establishment of payment terms, timing, capacity and location
of Special Facilities (if any); and
(iii)
specific terms related to our provision of ongoing water and
wastewater services to our local governmental customers as well as
the governmental entity’s end-use customers.
Although we have exclusive long-term water and wastewater service
contracts for 24,000 acres of the 27,000-acre Lowry Range pursuant
to the Service Agreement, providing water and wastewater services
to areas other than Sky Ranch and the majority of the Lowry Range
is subject to competition. Alternate sources of water are
available, principally from other private parties, such as farmers
or others owning water rights that have historically been used for
agriculture, and from municipalities seeking to annex new
development areas in order to increase their tax base. Our
principal competition in areas close to the Lowry Range is the City
of Aurora. Principal factors affecting competition for potential
purchasers of our Export Water include the availability of water
for the particular purpose, the cost of delivering the water to the
desired location (including the cost of required taps), and the
reliability of the water supply during drought periods. We estimate
that the water assets we own and have the exclusive right to use
have a supply capacity of approximately 57,800 SFE units, and we
believe they provide us with a significant competitive advantage
along the Front Range. Our legal rights to the Rangeview Water
Supply have been confirmed for municipal use, and our water supply
is close to Denver area water users. We believe our pricing
structure is competitive and our water portfolio is well balanced
with senior surface water rights, groundwater rights, storage
capacity and reclaimed water supplies.
Environmental, Health and Safety Regulation
Provision of water and wastewater services is subject to regulation
under the federal Safe Drinking Water Act, the Clean Water Act,
related state laws, and federal and state regulations issued under
these laws. These laws and regulations establish criteria and
standards for drinking water and for wastewater discharges. In
addition, we are subject to federal and state laws and other
regulations relating to solid waste disposal and certain other
aspects of our operations.
Environmental compliance issues may arise in the normal course of
operations or as a result of regulatory changes. We attempt to
align capital budgeting and expenditures to address these issues in
a timely manner.
Safe
Drinking Water Act –
The Safe Drinking Water Act establishes
criteria and procedures for the U.S. Environmental Protection
Agency (the “EPA”) to develop national quality
standards for drinking water. Regulations issued pursuant to the
Safe Drinking Water Act and its amendments set standards on the
amount of certain microbial and chemical contaminants and
radionuclides allowable in drinking water. The State of Colorado
has assumed primary responsibility for enforcing the standards
established by the Safe Drinking Water Act and has adopted the
Colorado Primary Drinking Water Standards (5 CCR 1003-1). Current
requirements for drinking water are not expected to have a material
impact on our financial condition or results of operations as we
have made and are making investments to meet existing water quality
standards. In the future, we might be required to change
our
16
method of treating drinking water and make
additional capital investments if additional regulations become
effective.
The federal Groundwater Rule became effective December 1,
2009. This rule requires additional testing of water from well
sources and under certain circumstances requires demonstration and
maintenance of effective disinfection. In 2009, Colorado adopted
Article 13 to the Colorado Primary Drinking Water Standards to
establish monitoring and compliance criteria for the Groundwater
Rule. We have implemented measures to comply with the Groundwater
Rule.
Clean
Water Act
–
The Clean Water Act regulates
wastewater discharges from drinking water and wastewater treatment
facilities and storm water discharges into lakes, rivers, streams,
and wetlands. The State of Colorado has assumed primary
responsibility for enforcing the standards established by the
federal Clean Water Act for wastewater discharges from domestic
water and wastewater treatment facilities and has adopted the
Colorado Water Quality Control Act and related regulations, which
also regulate discharges to groundwater. It is our policy to obtain
and maintain all required permits and approvals for discharges from
our water and wastewater facilities and to comply with all
conditions of those permits and other regulatory requirements. A
program is in place to monitor facilities for compliance with
permitting, monitoring and reporting for wastewater discharges.
From time to time, discharge violations might occur which might
result in fines and penalties, but we have no reason to believe
that any such fines or penalties are pending or will be
assessed.
In the future, we anticipate changing our method of treating
wastewater, which will require future additional capital
investments, as additional regulations become effective. During
fiscal year 2016, we invested $368,600 to design, permit and
construct a 13 million gallon effluent storage reservoir at our
wastewater treatment facility and have converted our facility to a
zero discharge treatment facility. We are storing the treated
effluent water and expect to use the water for agricultural and
irrigation uses.
Solid
Waste Disposal –
The handling and disposal of residuals and
solid waste generated from water and wastewater treatment
facilities is governed by federal and state laws and regulations.
We have a program in place to monitor our facilities for compliance
with regulatory requirements, and we do not anticipate that costs
associated with our handling and disposal of waste material from
our water and wastewater operations will have a material impact on
our business or financial condition.
Employees
We currently have six full-time employees.
Available Information and Website Address
Our website address is
www.purecyclewater.com
.
We make available free of charge through our website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to these reports as soon as
reasonably practicable after filing with the Securities and
Exchange Commission (“SEC”).
These reports and all other material we file
with the SEC may be obtained directly from the SEC’s
website,
www.sec.gov/edgar/searchedgar/companysearch.html
,
under CIK code
276720
.
The contents of our website are not incorporated by reference into
this report. You may also read and copy any materials we file with
the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. Operating information for the Public
Reference Room is available by calling the SEC at
1-800-SEC-0330.
The following section describes the material risks and
uncertainties that management believes could have a material
adverse effect on our business, financial condition, results of
operations, and the market price of our common stock. The risks
discussed below include forward-looking statements, and our actual
results may differ materially from those discussed in these
forward-looking statements. These risks should be read in
conjunction with the other information set forth in this report,
including the accompanying financial statements and notes
thereto.
Our
net losses may continue and we may not have sufficient cash flows
from operations or other capital resources to pursue our business
objectives.
We have
experienced significant net losses, our cash flows
from
17
operations have not been sufficient to fund
our operations in the past and we have been required to raise debt
and equity capital and sell assets to remain in operation. Since
2004, we have obtained $76.2 million through (i) the issuance of
$25.2 million of common stock (includes the issuance of stock
pursuant to the exercise of options, net of expenses), (ii) the
issuance of $5.2 million of Convertible Debt, which was converted
to common stock on January 11, 2011, and (iii)
the sale of
our Arkansas River water and land for approximately $45.8 million
in cash
. Our ability to
fund our operational needs and meet our business objectives will
depend on our ability to generate cash from future operations. We
currently have a limited number of customers. If our future cash
flows from operations and other capital resources are not
sufficient to fund our operations and the significant capital
expenditure requirements to build our water delivery systems, we
may be forced to reduce or delay our business activities, or seek
to obtain additional debt or equity capital. Economic conditions
and disruptions have previously caused substantial volatility in
capital markets, including credit markets and the banking industry,
increasing the cost and significantly reducing the availability of
financing, which may reoccur in the future. There can be no
assurance that financing will be available on acceptable terms or
at all.
The
rates the District is allowed to charge customers on the Lowry
Range are limited by the Lease with the Land Board, and our
contract with the District and may not be sufficient to cover our
costs of construction and operation.
The prices charged by the District for water
service on the Lowry Range are subject to pricing regulations set
forth in the Lease with the Land Board. Both the tap fees and usage
rates and charges are capped at the average of the rates of three
nearby water providers. Annually the District surveys the tap fees
and rates of the three nearby providers, and the District may
adjust tap fees and rates and charges for water service on the
Lowry Range based on the average of those charged by this group,
and we receive 98% of whatever the District charges its customers.
Our costs associated with the construction of water delivery
systems and the production, treatment and delivery of water are
subject to market conditions and other factors, which may increase
at a significantly higher rate than that of the fees we receive
from the District. Factors beyond our control and which cannot be
predicted, such as government regulations, insurance and labor
markets, drought, water contamination and severe weather
conditions, like tornadoes and floods, may result in additional
labor and material costs that may not be recoverable under the
current rate structure. Either increased customer demand or
increased water conservation may also impact the overall cost of
our operations. If the costs for construction and operation of our
wholesale water services, including the cost of extracting our
groundwater, exceed our revenues, we would be providing service to
the District for use at the Lowry Range at a loss. The District may
petition the Land Board for rate increases; however, there can be
no assurance that the Land Board would approve a rate increase
request. Further, even if a rate increase were approved, it might
not be granted in a timely manner or in an amount sufficient to
cover the expenses for which the rate increase was
sought.
Our
business is subject to seasonal fluctuations and weather conditions
that could affect demand for our water service and our
revenues.
We depend on an
adequate water supply to meet the present and future demands of our
customers and their end-use customers and to continue our expansion
efforts. Conditions beyond our control may interfere with our water
supply sources. Drought and overuse may limit the availability of
water. These factors might adversely affect our ability to supply
water in sufficient quantities to our customers, and our revenues
and earnings may be adversely affected. Additionally, cool and wet
weather, as well as drought restrictions and our customers’
conservation efforts, may reduce consumption demands, adversely
affecting our revenue and earnings. Furthermore, freezing weather
may contribute to water transmission interruptions caused by pipe
and main breakage. If we experience an interruption in our water
supply, it could have a material adverse effect on our financial
condition and results of operations. Demand for our water during
the warmer months is generally greater than during cooler months
due primarily to additional requirements for water in connection
with cooling systems, irrigation systems and other outside water
use. Throughout the year, and particularly during typically warmer
months, demand will vary with temperature and rainfall levels. If
temperatures during the typically warmer months are cooler than
expected or there is more rainfall than expected, the demand for
our water may decrease and adversely affect our
revenues.
Sales
to the fracking industry can fluctuate significantly.
Our water sales have been
historically highly concentrated directly and indirectly with one
company providing fracking services to the oil and gas industry on
and around the Lowry Range and our Sky Ranch property. Sales to
this customer base as well as renewals of our oil and gas leases,
if any, in the future are impacted by regulations, fracking
technologies, the success of the wells and the price of oil and
gas, among other things. Investment in oil and gas development is
dependent on the price of oil and gas and, recently, the price of
oil has decreased significantly
and has
remained at relatively low levels
. These water
18
sales essentially ceased in March 2015, and
we have no contractual commitment that will ensure these sales will
resume in the future.
We
are dependent on the housing market and development in our targeted
service areas for future revenues.
Providing wholesale water service using our
Colorado Front Range water supplies is our principal source of
future revenue. The timing and amount of these revenues will depend
significantly on housing developments being built near our water
assets. The development of these areas is subject to many factors
that are not within our control, and there can be no assurance that
development will occur or that water sales will occur on acceptable
terms or in the amounts or time required for us to support our
costs of operation. In the event wholesale water sales are not
forthcoming or development on the Lowry Range, Sky Ranch or other
developments in our targeted service areas is delayed indefinitely,
we may need to use our capital resources, incur additional short or
long-term debt obligations or seek to sell additional equity, and
there are no assurances that we would
have
sufficient capital resources or
be successful in obtaining additional
operating capital. After several years of significant declines in
new home construction, there have been positive market gains in the
Colorado housing market since 2013. However, if the downturn in the
homebuilding and credit markets return or if the national economy
weakens and economic concerns intensify, it could have a
significant negative impact on our business and financial
condition.
Development
on the Lowry Range is not within our control and is subject to
obstacles.
Development on
the Lowry Range is controlled by the Land Board, which is governed
by a five-person citizen board of commissioners representing
education, agriculture, local government and natural resources,
plus one at-large commissioner, each appointed for a four-year term
by the Colorado governor and approved by the Colorado Senate. The
Land Board’s focus with respect to issues such as development
and conservation on the Lowry Range tends to change as membership
on the Land Board changes. In addition, there are often significant
delays in the adoption and implementation of plans with respect to
property administered by the Land Board because the process
involves many constituencies with diverse interests. In the event
water sales are not forthcoming or development of the Lowry Range
is delayed or abandoned, we may need to use our capital resources,
incur additional short or long-term debt obligations or seek to
sell additional equity, and there are no assurances that we
would
have
sufficient capital resources or
be successful in obtaining additional
operating capital.
Because of the prior use of the Lowry Range as a military facility,
environmental clean-up may be required prior to development,
including the removal of unexploded ordnance. The U.S. Army Corps
of Engineers has been conducting unexploded ordnance removal
activities at the Lowry Range for more than 20 years. Continued
activities are dependent on federal appropriations, and the Army
Corps of Engineers has no assurance from year to year of such
appropriations for its activities at the Lowry Range.
Our
construction of water and wastewater projects may expose us to
certain completion, performance and financial risks.
We expect to rely on independent
contractors to construct our water and wastewater facilities. These
construction activities may involve risks, including shortages of
materials and labor, work stoppages, labor relations disputes,
weather interference, engineering, environmental, permitting or
geological problems and unanticipated cost increases. These issues
could give rise to delays, cost overruns or performance
deficiencies, or otherwise adversely affect the construction or
operation of our water and wastewater delivery systems. In
addition, we may experience quality problems in the construction of
our systems and facilities, including equipment failures. We cannot
assure you that we will not face claims from customers or others
regarding product quality and installation of equipment placed in
service by contractors.
Certain of our contracts may be fixed-price contracts, in which we
may bear all or a significant portion of the risk for cost
overruns. Under these fixed-price contracts, contract prices are
established in part based on fixed, firm subcontractor quotes on
contracts and on cost and scheduling estimates. These estimates may
be based on a number of assumptions, including assumptions about
prices and availability of labor, equipment and materials, and
other issues. If these subcontractor quotations or cost estimates
prove inaccurate, or if circumstances change, cost overruns may
occur, and our financial results would be negatively impacted. In
many cases, the incurrence of these additional costs would not be
within our control.
We may have contracts in which we guarantee project completion by a
scheduled date. At times, we may guarantee that the project, when
completed, will achieve certain performance standards. If we fail
to complete the project as scheduled, or if we fail to meet
guaranteed performance standards, we may be held responsible for
cost impacts
19
and/or penalties to the customer resulting from any delay or for
the costs to alter the project to achieve the performance
standards. To the extent that these events occur and are not due to
circumstances for which the customer accepts responsibility or
cannot be mitigated by performance bonds or the provisions of our
agreements with contractors, the total costs of the project would
exceed our original estimates and our financial results would be
negatively impacted.
Our customers may require us to secure performance and completion
bonds for certain contracts and projects. The market environment
for surety companies has become more risk averse. We secure
performance and completion bonds for our contracts from these
surety companies. To the extent we are unable to obtain bonds, we
may not be awarded new contracts. We cannot assure you that we can
secure performance and completion bonds when required.
Design, construction or system failures could result in injury to
third parties or damage to property. Any losses that exceed claims
against our contractors, the performance bonds and our insurance
limits at such facilities could result in claims against us. In
addition, if there is a customer dispute regarding performance of
our services, the customer may decide to delay or withhold payment
to us.
We
have a limited number of employees and may not be able to manage
the increasing demands of our operations.
We have a limited number of employees to
administer our existing assets, interface with applicable
governmental bodies, market our services and plan for the
construction and development of our future assets. We may not be
able to maximize the value of our water assets because of our
limited manpower. We depend significantly on the services of Mark
W. Harding, our President and Chief Financial Officer. The loss of
Mr. Harding would cause a significant interruption of our
operations. The success of our future business development and
ability to capitalize on growth opportunities depends on our
ability to attract and retain additional experienced and qualified
persons to operate and manage our business. State regulations set
the training, experience and qualification standards required for
our employees to operate specific water and wastewater facilities.
Failure to find state-certified and qualified employees to support
the operation of our facilities could put us at risk for, among
other things, regulatory penalties (including fines and suspension
of operations), operational errors at the facilities, improper
billing and collection processes, and loss of contracts and
revenues. We cannot assure you that we can successfully manage our
assets and our growth.
A
failure of the water wells or distribution networks that we own or
control could result in losses and damages that may affect our
financial condition and reputation.
We distribute water through a network of
pipelines and store water in storage tanks and a pond. A failure of
these pipelines, tanks or the pond could result in injuries and
damage to property for which we may be responsible, in whole or in
part. The failure of these pipelines, tanks, or pond may also
result in the need to shut down some facilities or parts of our
water distribution network in order to conduct repairs. Such
failures and shutdowns may limit our ability to supply water in
sufficient quantities to our customers and to meet the water
delivery requirements prescribed by our contracts, which could
adversely affect our financial condition, results of operations,
cash flow, liquidity and reputation. Any business interruption or
other losses might not be covered by insurance policies or be
recoverable through rates and charges, and such losses may make it
difficult for us to secure insurance in the future at acceptable
rates.
Conflicts
of interest may arise relating to the operation of the District and
the Sky Ranch District.
Our
officers and employees constitute 60% of the directors of the
District as well as the Sky Ranch District. Pure Cycle, along with
our officers and employees and two unrelated individuals, own the
40 acres that constitute the District and the acreage that
constitutes the Sky Ranch Metropolitan District that will be the
retail water and wastewater service provider for the first phase of
Sky Ranch. We have made loans to the District to fund its
operations. At August 31, 2016, total principal and interest owed
to us by the District was $628,500. Pursuant to our Service
Agreement with the District for the provision of water services,
the District retains two percent of the revenues from the sale of
water to its end-use customers on the Lowry Range. Proceeds from
the fee collections will initially be used to repay the
District’s obligations to us, but after these loans are
repaid, the District is not required to use the funds to benefit
Pure Cycle. Similarly, we have made loans to and incurred expenses
reimbursable by the Sky Ranch District. At August 31, 2016,
total principal and interest owed to us by the Sky Ranch District
was $171,900. It is anticipated that these amounts will be repaid
once Sky Ranch has sold residential units and has customers to pay
for services. We have received benefits from our activities
undertaken in conjunction with these districts, but conflicts may
arise between our interests and those of the districts and our
officers and employees who are acting in dual capacities in
negotiating contracts to which both we and a district are parties.
We expect that both districts will expand when more properties are
developed and become part of the respective districts, and our
officers and employees acting as directors of these districts will
have fiduciary
20
obligations to those other constituents.
There can be no assurance that all conflicts will be resolved in
the best interests of the Company and our shareholders. In
addition, other landowners coming into a district will be eligible
to vote and to serve as directors of that district. There can be no
assurances that our officers and employees will remain as directors
of either District or that the actions of subsequently elected
boards would not have an adverse impact on our
operations.
Our
operations are affected by local politics and governmental
procedures which are beyond our control.
We operate in a highly political
environment. We market our water rights to municipalities and other
governmental entities run by elected or politically appointed
officials. Our principal competitors are municipalities seeking to
expand their sales tax base and other water districts. Various
constituencies, including our competitors, developers,
environmental groups, conservation groups, and agricultural
interests, have competing agendas with respect to the development
of water rights in Colorado, which means that decisions affecting
our business are based on many factors other than economic and
business considerations. Additional risks associated with dealing
with governmental entities include turnover of elected and
appointed officials, changes in policies from election to election,
and a lack of institutional history in these entities concerning
their prior courses of dealing with the Company. We spend
significant time and resources educating elected officials, local
authorities and others regarding our water rights and the benefits
of contracting with us. Political concerns and governmental
procedures and policies may hinder or delay our ability to enter
into service agreements or develop our water rights or
infrastructure to deliver our water. While we have worked to reduce
the political risks in our business through our participation as
the service provider for the District in regional cooperative
resource programs, such as the SMWSA and its WISE partnership with
Denver Water and Aurora Water, as well as education and
communication efforts and community involvement, there can be no
assurance that our efforts will be successful.
Our
Lowry Range Surface water rights are “conditional
decrees” and require findings of reasonable diligence.
Our surface water interests and
reservoir sites at the Lowry Range are conditionally decreed and
are subject to a finding of reasonable diligence from the Colorado
water court every six years. To arrive at a finding of reasonable
diligence, the water court must determine that we continue to
diligently pursue the development of said water rights. If the
water court is unable to make such a finding, we could lose the
water right under review. During fiscal 2012, the Lowry Range
conditional decrees were granted their first review by the water
court which determined that we and the District met the diligence
criteria. The water court entered a finding of reasonable diligence
on the Lowry Range surface water decrees on February 11, 2012. Our
next diligence period will be in February 2018. If the water court
does not make a determination of reasonable diligence in 2018, it
would materially adversely impact the value of our interests in the
Rangeview surface water supply.
Water
quality standards are subject to regulatory change.
We must provide water that meets
all federal and state regulatory water quality standards and
operate our water and wastewater facilities in accordance with
these standards. Future changes in regulations governing the supply
of drinking water and treatment of wastewater may have a material
adverse impact on our financial results. With respect to service of
customers on the Lowry Range, the District’s rates might not
be sufficient to cover the cost of compliance with additional or
more stringent requirements. If the cost of compliance were to
increase, we anticipate that the rates of the nearby water
providers that the District uses to establish its rates and charges
would increase to reflect these cost increases, thereby allowing
the District to increase its rates and charges. However, there can
be no assurance that these water providers would raise their rates
in an amount that would be sufficient to enable the District (and
us) to cover any increased compliance costs.
Contamination
to our water supply may result in disruption in our services and
litigation, which could adversely affect our business, operating
results and financial condition.
Our water supplies are subject to the risk
of potential contamination, including contamination from naturally
occurring compounds, pollution from man-made sources and
intentional sabotage. Our land at Sky Ranch and a portion of the
Lowry Range have been leased for oil and gas exploration and
development. Such exploration and development could expose us to
additional contamination risks from related leaks or spills. In
addition, we handle certain hazardous materials at our water
treatment facilities, primarily sodium hypochlorite. Any failure of
our operation of the facilities or any contamination of our
supplies, including sewage spills, noncompliance with water quality
standards, hazardous materials leaks and spills, and similar events
could expose us to environmental liabilities, claims and litigation
costs. If any of these events occur, we may have to interrupt the
use of that water supply until we are able to substitute
the
21
supply from another source or treat the
contaminated supply. We cannot assure you that we will successfully
manage these issues, and failure to do so could have a material
adverse effect on our future results of
operations.
We may incur significant costs in order to treat the contaminated
source through expansion of our current treatment facilities or
development of new treatment methods. If we are unable to
substitute water supply from an uncontaminated water source, or to
adequately treat the contaminated water source in a cost-effective
manner, there may be an adverse effect on our revenues, operating
results and financial condition. The costs we incur to
decontaminate a water source or an underground water system could
be significant and could adversely affect our business, operating
results and financial condition and may not be recoverable in
rates.
We could also be held liable for consequences arising out of human
exposure to hazardous substances in our water supplies or other
environmental damage. For example, private plaintiffs could assert
personal injury or other toxic tort claims arising from the
presence of hazardous substances in our drinking water supplies.
Although we have not been a party to any environmental or
pollution-related lawsuits, such lawsuits have increased in
frequency in recent years. If we are subject to an environmental or
pollution-related lawsuit, we might incur significant legal costs,
and it is uncertain whether we would be able to recover the legal
costs from ratepayers or other third parties. Our insurance
policies may not cover or provide sufficient coverage for the costs
of these claims.
Climate
change laws and regulations may be adopted by federal and state
environmental agencies that could require additional capital
expenditures and increase our operating costs.
Climate change is receiving ever increasing
attention worldwide. Possible new climate change laws and
regulations, if enacted, may require us to monitor and/or change
our operations. It is possible that new standards could be
imposed that will require additional capital expenditures or raise
our operating costs.
With respect
to service of customers on the Lowry Range, the District’s
rates might not be sufficient to cover the cost of compliance with
new requirements.
Although we would expect the rates of the
nearby water providers that the District uses to establish its
rates and charges to increase to cover increased compliance
costs,
w
e
cannot assure you that our costs of complying with new standards or
laws will not adversely affect our business, results of operations
or financial condition.
We
may be adversely affected by any future decision by the Colorado
Public Utilities Commission to regulate us as a public
utility.
The Colorado
Public Utilities Commission (“CPUC”) regulates
investor-owned water companies operating for the purpose of
supplying water to the public. The CPUC regulates many aspects of
public utilities’ operations, including establishing water
rates and fees, initiating inspections, enforcement and compliance
activities and assisting consumers with complaints. We do not
believe we are a public utility under Colorado law. We currently
provide services by contract mainly to the District, which supplies
the public. Quasi-municipal metropolitan districts, such as the
District and the Sky Ranch District, are exempt by statute from
regulation by the CPUC. However, the CPUC could attempt to regulate
us as a public utility. If this were to occur, we might incur
significant expense challenging the CPUC’s assertion of
jurisdiction, and we may be unsuccessful. In the future, existing
regulations may be revised or reinterpreted, and new laws and
regulations may be adopted or become applicable to us or our
facilities. If we become regulated as a public utility, our ability
to generate profits could be limited, and we might incur
significant costs associated with regulatory
compliance.
The
District’s and our rights under the Lease have been
challenged by third parties.
The District’s and our rights under
the Lease have been challenged by third parties, including the Land
Board, in the past. In 2014, in connection with settling a lawsuit
filed by us and the District against the Land Board, the Land
Board, the District and we amended and restated the Lease to
clarify and update a number of provisions. However, there are
issues still subject to negotiation and it is likely that during
the remaining 65-year term of the Lease the parties will disagree
over interpretations of provisions in the Lease again. There can be
no assurance that the District’s or our rights under the
Lease will not be challenged in the future, which could require
potentially expensive litigation to enforce our
rights.
We
are subject to the risk of possibly being required to register as
an investment company.
On
August 18, 2015, we completed the sale of our Arkansas River
properties and water rights for approximately $45.8 million in
cash. The net proceeds still remaining from that sale, which
currently represents 42% of our total assets, are currently
invested in U.S. treasury notes and certificates of deposit, which
may be regarded as “investment securities” under the
Investment Company Act of 1940, as amended (the “Investment
Company Act”). Although our board of directors believes that
we are not engaged primarily in the business of investing,
reinvesting, or trading in securities, and we do not hold ourselves
out as being primarily engaged in those activities, we could fall
within the scope of
22
Section 3(a)(1)(C) of the Investment
Company Act if the net proceeds from the sale of the Arkansas River
water properties and water rights and other cash and cash
equivalents are invested in investment securities (as defined in
the Investment Company Act) and such investment securities
represent more than 40% of our total assets (exclusive of cash and
certain cash equivalents). A company that falls within the scope of
Section 3(a)(1)(C) of the Investment Company Act can avoid
being regulated as an investment company if it can rely on certain
of the exclusions from being deemed to be an “investment
company” under the Investment Company Act. One such exclusion
is Rule 3a-2 under the Investment Company Act, which provides
that a company is deemed not to be an investment company during a
period of time not to exceed one year provided that the company has
a bona fide intent to be engaged primarily, as soon as is
reasonably possible (in any event by the termination of such period
of time), in a business other than that of an investment company.
If necessary, our board of directors would explore transactions
pursuant to which we would cease to be deemed to be an investment
company, such as the disposition of our investment securities,
including through liquidation, or the acquisition of sufficient
assets that are not investment securities in order for us not to be
deemed an investment company under the Investment Company Act.
There can be no assurance that we would be able to complete such
actions by the applicable deadline, or at all. If we were required
to register as an “investment company” under the
Investment Company Act, applicable restrictions could make it
impractical for us to continue our business as currently conducted
and could have a material adverse effect on us.
Our
stock price has been volatile in the past and may decline in the
future.
Our common stock
has experienced significant price and volume fluctuations in the
past and may experience significant fluctuations in the future
depending upon a number of factors, some of which are beyond our
control. Factors that could affect our stock price and trading
volume include, among others, the perceived prospects of our
business; differences between anticipated and actual operating
results; changes in analysts’ recommendations or projections;
the commencement and/or results of litigation and other legal
proceedings; and future sales of our common stock by us or by
significant shareholders, officers and directors. In addition,
stock markets in general have experienced price and volume
volatility from time to time, which may adversely affect the market
price of our common stock for reasons unrelated to our
performance.
None.
Corporate
Office
–
Effective January 2016, we 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. We
plan to extend our lease for office space after December
2016.
Water
Related Assets
– In addition to the water
rights and adjudicated reservoir sites that are described in
Item
1 – Our Water and Land Assets
, we also own a 500,000-gallon water tank,
400,000-barrel storage reservoir, a 300,000-barrel storage
reservoir, three deep water wells, a pump station, and several
miles of water pipeline in Arapahoe County, Colorado. Additionally,
although owned by the District, we operate and maintain another
500,000-gallon water tank, two deep water wells, a pump station,
three alluvial wells, the District’s wastewater treatment
plant, and water distribution and wastewater collection pipelines
that serve customers located at the Lowry Range. These assets are
used to provide service to our existing
customers.
Land
–
We own approximately 931 acres of land known as Sky Ranch that is
described further in
Item 1 – Our
Water and Land Assets – Sky Ranch.
We also own 40 acres of land that comprise
the current boundaries of the District.
None.
None.
23
Market Information
Our common stock is traded on the NASDAQ Capital Market under the
symbol “PCYO.” The high and low sales prices of our
common stock, by quarter, for the fiscal years ended August 31,
2016 and 2015 are presented below:
|
Table E - Market Information
|
||||
|
Fiscal 2016 quarters ended:
|
August 31
|
May 31
|
February 29
|
November 30
|
|
Market price of common stock
|
|
|
|
|
|
High
|
$
5.20
|
$
4.91
|
$
5.12
|
$
5.73
|
|
Low
|
$
4.34
|
$
4.29
|
$
3.65
|
$
4.56
|
|
|
|
|
|
|
|
Fiscal 2015 quarters ended:
|
August 31
|
May 31
|
February 28
|
November 30
|
|
Market price of common stock
|
|
|
|
|
|
High
|
$
5.55
|
$
5.50
|
$
5.26
|
$
7.00
|
|
Low
|
$
4.37
|
$
4.12
|
$
3.54
|
$
4.94
|
Holders
On October 20, 2016, there were 976 holders of record of our common
stock.
Dividends
We have never paid any dividends on our
common stock and expect for the foreseeable future to retain all of
our capital and earnings from operations, if any, for use in
expanding and developing our business. Any future decision as to
the payment of dividends will be at the discretion of our board of
directors and will depend upon our earnings, financial position,
capital requirements, plans for expansion and such other factors as
our board of directors deems relevant. The terms of our Series B
Preferred Stock prohibit payment of dividends on common stock
unless all dividends accrued on the Series B Preferred Stock have
been paid and require dividends to be paid on the Series B
Preferred Stock if proceeds from the sale of Export Water exceed
$36,026,232. For further discussion see Note 8 –
Shareholders’
Equity
to the
accompanying financial statements.
Performance Graph
1
This graph compares the cumulative total
return of our common stock for the last five fiscal years with the
cumulative total return for the same period of the S&P 500
Index and a peer group index.
2
The graph assumes the investment
of $100 in common stock in each of the indices as of the market
close on August 31 and reinvestment of all
dividends.
|
|
8/11
|
8/12
|
8/13
|
8/14
|
8/15
|
8/16
|
|
|
|
|
|
|
|
|
|
Pure Cycle Corporation
|
100.00
|
67.57
|
175.68
|
220.27
|
168.92
|
163.51
|
|
S&P 500
|
100.00
|
118.00
|
140.07
|
175.43
|
176.27
|
198.4
|
|
Peer Group
|
100.00
|
113.85
|
136.49
|
151.56
|
159.21
|
203.12
|
|
|
24
1.
This performance graph is not “soliciting material,” is
not deemed “filed” with the SEC and is not to be
incorporated by reference in any of our filings under the
Securities Act or the Exchange Act whether made before or after the
date hereof and irrespective of any general incorporation language
in any such filing.
2.
The Peer Group consists of the following companies that have been
selected on the basis of industry focus or industry leadership:
American States Water Company, Aqua America, Inc., Artesian
Resources Corp., California Water Service Group, Connecticut Water
Service, Inc., Middlesex Water Company, SJW Corp., and The York
Water Company.
Recent Sales of Unregistered Securities; Use of Proceeds From
Registered Securities
None.
Purchase of Equity Securities By the Issuer and Affiliated
Purchasers
None.
25
|
Table
F - Selected Financial Data
|
|||||
|
In thousands (except per share data)
|
|
For the Fiscal Years Ended August 31,
|
|||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Summary Statement of Operations Items:
|
|
|
|
|
|
|
Total revenues
|
$
452.2
|
$
1,196.6
|
$
2,023.1
|
$
615.6
|
$
284.4
|
|
(Loss) income from continuing operations
|
$
(1,230.3
)
|
$
(575.1)
|
$
285.5
|
$
(1,227.9
)
|
$
(6,947.3
)
|
|
Net loss
|
$
(1,310.6
)
|
$
(23,127.9
)
|
$
(311.4
)
|
$
(4,150.4
)
|
$
(17,418.7
)
|
|
Basic and diluted loss per share
|
$
(0.06
)
|
$
(0.96
)
|
$
(0.01
)
|
$
(0.17
)
|
$
(0.72
)
|
|
Weighted average shares outstanding
|
23,781
|
24,041
|
24,038
|
24,038
|
24,038
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
||||
|
Summary
Balance Sheet Information:
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Current assets
|
$
29,085.9
|
$
39,580.9
|
$
4,463.3
|
$
9,900.0
|
$
7,661.8
|
|
Total assets
|
$
70,879.6
|
$
73,060.9
|
$
108,173.8
|
$
108,618.3
|
$
111,582.0
|
|
Current liabilities
|
$
482.2
|
$
1,499.1
|
$
3,274.4
|
$
5,402.3
|
$
6,254.8
|
|
Long-term liabilities
|
$
1,399.5
|
$
1,476.4
|
$
13,868.9
|
$
65,443.5
|
$
75,209.5
|
|
Total liabilities
|
$
1,881.7
|
$
2,975.5
|
$
17,143.3
|
$
70,845.8
|
$
81,464.3
|
|
Equity
|
$
68,997.9
|
$
70,085.5
|
$
91,030.5
|
$
37,772.5
|
$
30,117.8
|
The following items had a significant impact on our
operations:
(a)
In fiscal 2016, we invested $923,800 in our water and wastewater
systems and $285,600 for planning and design of our Sky Ranch
property. We also purchased three farms for approximately $450,300
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.
(b)
In fiscal 2015, we sold our remaining farm assets for approximately
$45.8 million, for a loss of approximately $22.3 million. In
conjunction with the sale, we repaid $4.9 million in mortgage debt
relating to the farms and we invested approximately $3.5 million
into our water systems. Financial results for the farm assets have
been reflected as discontinued operations and all prior periods
have been reclassified.
(c)
In fiscal 2014, in order to protect our farm
assets, we acquired the remaining approximately $2.6 million of the
$9.6 million in notes defaulted on by High Plains A&M, LLC
(“HP A&M”)
.
Additionally,
we borrowed $1.75 million, sold farms for $5.8 million, and
invested $3.7 million in our water systems. Additionally, we
recorded an impairment of approximately $400,000 on land and water
rights held for sale, and we recorded a gain of $1.3 million upon
completing the sale of certain farms that we previously impaired in
fiscal 2012.
(d)
In fiscal 2013, in order to protect our farm assets, we acquired
approximately $7 million of the $9.6 million in HP A&M
defaulted notes. Additionally, we sold 1,500,000 unregistered
shares of Pure Cycle common stock owned by HP A&M for $2.35 per
share, yielding approximately $3.4 million, net of
expenses.
(e)
In fiscal 2012, the Paradise Water Supply asset was deemed fully
impaired and the entire asset value of $5.5 million was written off
and recorded in the accompanying financial statements.
Additionally, we recorded an impairment of $6.5 million on
land and water rights held for sale.
26
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” and elsewhere in this 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 the 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 Form 10-K should
be read in conjunction with our disclosure under the heading
“FORWARD-LOOKING STATEMENTS” on page
1.
The following Management’s Discussion
and Analysis (“MD&A”) is intended to help the
reader understand the results of operations and our financial
condition and should be read in conjunction with the accompanying
financial statements and the notes thereto included in
Part II, Item
8
of this Annual Report
on Form 10-K. The following sections focus on the key indicators
reviewed by management in evaluating our financial condition and
operating performance, including the following:
●
Revenue generated from providing water and wastewater
services;
●
Expenses associated with developing our water and land assets;
and
●
Cash available to continue development of our water rights 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.
Critical
Accounting Policies and Estimates
–
a discussion of our critical
accounting policies that require critical judgments, assumptions
and estimates.
Results of
Operations
–
an
analysis of our results of operations for
the three fiscal years presented in our 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.
Our Business
Pure Cycle Corporation is a Colorado corporation that provides
wholesale water and wastewater services to end-use customers of
governmental entities and to commercial and industrial
customers.
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 or controlling (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 currently provide wholesale water and wastewater service
predominately to two local governmental entity customers. Our
largest wholesale domestic customer is the District. We provide
service to the District and its end-use customers pursuant to the
Rangeview Water Agreements. Through the District, we serve 258 SFE
water
27
connections and 157 SFE wastewater connections located in
southeastern metropolitan Denver. In the past three years, we have
been providing untreated 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 decline in
oil prices, drilling has been significantly reduced, and as of the
date of this report, we are not selling water to the oil and gas
industry.
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 predominately 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.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the
financial statements.
The most significant accounting estimates inherent in the
preparation of our financial statements include estimates
associated with the timing of revenue recognition, the impairment
of water assets and other long-lived assets, fair value estimates
and share-based compensation. Below is a summary of these critical
accounting policies.
Revenue Recognition
Our revenues consist mainly of monthly
service fees, tap fees, construction fees, and consulting fees. As
further described in Note 2 –
Summary of Significant
Accounting Policies
to
the accompanying financial statements, proceeds from tap sales and
construction fees are deferred upon receipt and recognized in
income based on whether we own or do not own the facilities
constructed with the proceeds. We recognize tap and construction
fees derived from agreements for which we construct infrastructure
owned by others as revenue, along with the associated costs of
construction, pursuant to the percentage-of-completion method. The
percentage-of-completion method requires management to estimate the
percent of work that is completed on a particular project, which
could change materially throughout the duration of the construction
period and result in significant fluctuations in revenue recognized
during the reporting periods throughout the construction process.
We did not recognize any revenues pursuant to the
percentage-of-completion method during the fiscal years ended
August 31, 2016, 2015 or 2014.
Tap and construction fees derived from agreements for which we own
the infrastructure are recognized as revenue ratably over the
estimated service life of the assets constructed with said fees.
Although the cash will be received up-front and most construction
will be completed within one year of receipt of the proceeds,
revenue recognition may occur over 30 years or more. Management is
required to estimate the service life, and currently the service
life is based on the estimated useful accounting life of the assets
constructed with the tap fees. The useful accounting life of the
asset is based on management’s estimation of an
accounting-based useful life and may not have any correlation to
the actual life of the asset or the actual service life of the tap.
This is deemed a reasonable recognition life of the revenues
because the depreciation of the assets constructed generating those
revenues will therefore be matched with the revenues.
Monthly water usage fees, monthly wastewater service fees, and
consulting fees are recognized in income each month as
earned.
28
Pursuant to the O&G Lease and an oil and gas lease on 40 acres
of mineral estate the Company owns adjacent to the Lowry Range (the
“Rangeview Lease”), we received up-front payments which
are recognized as other income on a straight-line basis over the
initial term or extension of term, as applicable, of the
leases.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment whenever management
believes events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. We measure
recoverability of assets to be held and used by a comparison of the
carrying amount of an asset to estimated future undiscounted net
cash flows we expect to be generated by the eventual use of the
asset. If such assets are considered to be impaired and therefore
the costs of the assets deemed to be unrecoverable, the impairment
to be recognized would be the amount by which the carrying amount
of the assets exceeds the estimated fair value of the
assets.
Our water assets will be utilized in the provision of water
services which inevitably will encompass many housing and economic
cycles. Our service capacities are quantitatively estimated based
on an average single family home consuming approximately 0.2 acre
feet of water per year. Average water deliveries are approximately
0.4 acre feet; however, approximately 50% or 0.2 acre feet are
returned and available for reuse. Our water supplies are legally
decreed to us through the water court. The water court decree
allocates a specific amount of water (subject to continued
beneficial use) which historically has not changed. Thus,
individual housing and economic cycles typically do not have an
impact on the number of connections we can serve with our supplies
or the amount of water legally decreed to us relating to these
supplies.
We report assets to be disposed of at the lower of the carrying
amount or fair value less costs to sell.
Our
Water Rights –
We
determine the undiscounted cash flows for our Denver-based assets
by estimating tap sales to potential new developments in our
service areas and along the Front Range, using estimated future tap
fees less estimated costs to provide water services, over an
estimated development period. Actual new home development in our
service areas and the Front Range, actual future tap fees, and
actual future operating costs inevitably will vary significantly
from our estimates, which could have a material impact on our
financial statements as well as our results of operations. We
performed an impairment analysis as of August 31, 2016, and
determined there were no material changes and that our Denver-based
assets are not impaired and their costs are deemed recoverable. Our
impairment analysis is based on development occurring within areas
in which we have service agreements (e.g., Sky Ranch and the Lowry
Range) as well as in surrounding areas, including the Front Range
and the I-70 corridor. Our combined Rangeview Water Supply and Sky
Ranch water assets have a carrying value of $28.3 million as of
August 31, 2016. Based on the carrying value of our water rights,
the long-term and uncertain nature of any development plans,
current tap fees of $24,620 and estimated gross margins, we
estimate that we would need to add approximately 2,300 new water
connections (requiring 4% of our portfolio) to generate net
revenues sufficient to recover the costs of our Rangeview Water
Supply and Sky Ranch water. If tap fees increase 5%, we would need
to add approximately 2,200 new water taps (requiring 3.8% of our
portfolio) to recover the costs of our Rangeview Water Supply and
Sky Ranch water. If tap fees decrease 5%, we would need to add
approximately 2,400 new water taps (requiring 4.2% of our
portfolio) to recover the costs of our Rangeview Water Supply and
Sky Ranch water.
Although changes in the housing market throughout the Front Range
have delayed our estimated tap sale projections, these changes do
not alter our water ownership, nor our service obligations to
existing properties or the number of SFEs we can
service.
Fair Value Estimates
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. We
generally use 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.
See
Note 3 –
Fair Value
Measurements
to the
accompanying financial statements.
29
Share-based Compensation
We estimate the fair value of share-based
payment awards made to key employees and directors on the date of
grant using the Black-Scholes option-pricing model. We then expense
the fair value over the vesting period of the grant using a
straight-line expense model. The fair value of share-based payments
requires management to estimate/calculate various inputs
such as the volatility of the underlying stock, the expected
dividend rate, the estimated forfeiture rate and an estimated life
of each option. We do not expect any forfeiture of option grants;
therefore, the compensation expense has not been reduced for
estimated forfeitures. These assumptions are based on historical
trends and estimated future actions of option holders and may not
be indicative of actual events which may have a material impact on
our financial statements. For further details on share-based
compensation expense, see Note 8 –
Shareholders’
Equity
to the
accompanying financial statements.
Results of Operations
Executive Summary
The results of our operations for the fiscal years ended August 31,
2016, 2015 and 2014 were as follows:
|
Table G -
Summary of Results of Operations
|
|||||||
|
|
|
|
|
Change
|
|||
|
|
Fiscal Years
Ended August 31,
|
2016-2015
|
2015-2014
|
||||
|
|
2016
|
2015
|
2014
|
$
|
%
|
$
|
%
|
|
Millions of
gallons of water delivered
|
33.9
|
97.5
|
190.1
|
(63.6
)
|
-65
%
|
(92.6
)
|
-49
%
|
|
Water revenues
generated
|
$
221,000
|
$
970,000
|
$
1,879,500
|
$
(749,000
)
|
-77
%
|
$
(909,500
)
|
-48
%
|
|
Water delivery
operating costs incurred
|
|
|
|
|
|
|
|
|
(excluding depreciation and depletion)
|
$
264,400
|
$
464,900
|
$
547,600
|
$
(200,500
)
|
-43
%
|
$
(82,700
)
|
-15
%
|
|
Water
delivery gross margin %
|
-20
%
|
52
%
|
71
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wastewater
treatment revenues
|
$
43,700
|
$
50,100
|
$
45,400
|
$
(6,400
)
|
-13
%
|
$
4,700
|
10
%
|
|
Wastewater
treatment operating costs incurred
|
$
29,200
|
$
66,700
|
$
38,400
|
$
(37,500
)
|
-56
%
|
$
28,300
|
74
%
|
|
Wastewater treatment gross margin %
|
33
%
|
-33
%
|
15
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
$
131,700
|
$
120,700
|
$
42,400
|
$
11,000
|
9
%
|
$
78,300
|
185
%
|
|
Other income
costs incurred
|
$
68,500
|
$
55,200
|
$
39,400
|
$
13,300
|
24
%
|
$
15,800
|
40
%
|
|
Other
income gross margin %
|
48
%
|
54
%
|
7
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative expenses
|
$
1,849,700
|
$
1,939,400
|
$
2,445,600
|
$
(89,700
)
|
-5
%
|
$
(506,200
)
|
-21
%
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
from continuing operations
|
$
(1,230,300
)
|
$
(575,100
)
|
$
285,500
|
$
(655,200
)
|
114
%
|
$
(860,600
)
|
-301
%
|
|
Loss from
discontinued operations, net of taxes
|
$
(80,300
)
|
$
(22,552,800
)
|
$
(597,000
)
|
$
22,472,500
|
-100
%
|
$
(21,995,800
)
|
3684
%
|
|
Net
loss
|
$
(1,310,600
)
|
$
(23,127,900
)
|
$
(311,400
)
|
$
21,817,300
|
-94
%
|
$
(22,816,500
)
|
7327
%
|
Changes in Revenues and Gross Margin
We generate revenues from water and wastewater services. Water and
wastewater revenues are generated from (i) monthly wholesale water
usage fees and wastewater service fees, (ii) one-time water and
wastewater tap fees and construction fees, and (iii) consulting
fees.
Water
and Wastewater Revenues –
Our
water deliveries decreased 65% in fiscal 2016 compared to fiscal
2015 and decreased 49% in fiscal 2015 compared to fiscal 2014.
Water revenues decreased 77% in fiscal 2016 compared to fiscal 2015
and decreased 48% in fiscal 2015 compared to fiscal 2014. The
decreases in deliveries and sales were primarily due to the changes
in demand for water to be used for oil and gas activities –
namely, fracking wells drilled into the Niobrara formation. The
following table details the sources of our water sales, the number
of kgal (1,000 gallons) sold, and the average price per kgal for
fiscal 2016, fiscal 2015, and fiscal 2014.
30
|
Table H -
Water Revenue Summary
|
|||||||||
|
|
2016
|
2015
|
2014
|
||||||
|
Customer
Type
|
Sales (in
thousands)
|
kgal
|
Average
per kgal
|
Sales (in
thousands)
|
kgal
|
Average
per kgal
|
Sales (in
thousands)
|
kgal
|
Average
per kgal
|
|
On-Site
|
$
149.1
|
26,620.8
|
$
5.60
|
$
137.3
|
20,821.7
|
$
6.59
|
$
130.7
|
23,318.2
|
$
5.61
|
|
Export-Commercial
|
71.3
|
7,216.2
|
9.88
|
50.0
|
4,158.4
|
12.02
|
31.6
|
2,318.4
|
13.63
|
|
Industrial/Fracking
|
0.6
|
58.2
|
10.31
|
782.7
|
72,557.6
|
10.79
|
1,717.2
|
164,502.7
|
10.44
|
|
|
$
221.0
|
33,895.2
|
$
6.52
|
$
970.0
|
97,537.7
|
$
9.94
|
$
1,879.5
|
190,139.3
|
$
9.88
|
Our gross margin on delivering water (not including depletion
charges) was a loss of 20% during fiscal 2016 and income of 52% and
71% during fiscal 2015 and 2014, respectively. The changes in our
gross margins were due to changes in demand related to water sales
to the fracking industry and our ability to offset the ECCV system
costs with increased water deliveries in fiscal 2014 and decreasing
water deliveries in fiscal 2015 and fiscal 2016.
Our wastewater fees decreased 13% in fiscal 2016 compared to fiscal
2015 and increased 10% in fiscal 2015 compared to fiscal 2014.
Wastewater fee fluctuations result from demand changes from our
only customer.
We did not sell any water or wastewater taps during fiscal 2016,
2015 or 2014.
Other income consisted principally of
consulting fees of
$131,700, $85,800, and $42,400 for the
fiscal years ended August 31, 2016, 2015, and 2014, respectively.
Our consulting fees increased 54% in fiscal 2016 compared to fiscal
2015 and increased 102% in fiscal 2015 compared to fiscal 2014. The
increase in fees is the result of the additional management of new
water systems. We have increased from managing two systems during
fiscal 2014 to managing four systems during fiscal 2015 and five
systems during fiscal 2016. During the fiscal year ended August 31,
2015, we also received income related to a cost-sharing arrangement
from our industrial water sales related to the fracking industry in
the amount of $34,900. Our margins have fluctuated as we allocated
additional staff costs to system management.
General and Administrative Expenses
Table I details significant items, and changes, included in our
General and Administrative Expenses (“G&A
Expenses”) as well as the impact that share-based
compensation has on our G&A Expenses for the fiscal years ended
August 31, 2016, 2015 and 2014, respectively.
|
Table I -
G&A Expenses
|
|||||||
|
|
|
|
|
Change
|
|||
|
|
Fiscal Years Ended August
31,
|
2016-2015
|
2015-2014
|
||||
|
Significant
G&A Expense items:
|
2016
|
2015
|
2014
|
$
|
%
|
$
|
%
|
|
Salary and salary-related expenses
|
$
1,084,300
|
$
1,234,100
|
$
962,800
|
$
(149,800
)
|
-12
%
|
$
271,300
|
28
%
|
|
Professional fees
|
250,900
|
291,400
|
1,072,300
|
(40,500
)
|
-14
%
|
(780,900
)
|
-73
%
|
|
Fees paid to directors including insurance
|
134,400
|
140,400
|
120,400
|
(6,000
)
|
-4
%
|
20,000
|
17
%
|
|
Insurance
|
35,900
|
31,600
|
30,300
|
4,300
|
14
%
|
1,300
|
4
%
|
|
Public entity related expenses
|
109,500
|
83,200
|
92,500
|
26,300
|
32
%
|
(9,300
)
|
-10
%
|
|
Consulting fees
|
5,700
|
18,300
|
13,100
|
(12,600
)
|
-69
%
|
5,200
|
40
%
|
|
Property taxes
|
9,200
|
7,400
|
(50,300
)
|
1,800
|
24
%
|
57,700
|
-115
%
|
|
All other components of G&A combined
|
219,800
|
133,000
|
204,500
|
86,800
|
65
%
|
(71,500
)
|
-35
%
|
|
G&A
Expenses as reported
|
1,849,700
|
1,939,400
|
2,445,600
|
(89,700
)
|
-5
%
|
(506,200
)
|
-21
%
|
|
Share-based
compensation
|
(219,900
)
|
(240,000
)
|
(251,900
)
|
20,100
|
-8
%
|
11,900
|
-5
%
|
|
G&A
Expenses less share-based compensation
|
$
1,629,800
|
$
1,699,400
|
$
2,193,700
|
$
(69,600
)
|
-4
%
|
$
(494,300
)
|
-23
%
|
|
|
|
|
|
|
|
|
|
|
Note -
salary and salary-related expenses excluding share-based
compensation:
|
|
|
|
|
|
|
|
|
Salary and salary-related expenses
|
$
864,400
|
$
994,100
|
$
710,900
|
$
(129,700
)
|
-13
%
|
$
283,200
|
40
%
|
Salary
and Salary-Related Expenses
– Salary and salary-related expenses
decreased by 12% during fiscal 2016 as compared to fiscal 2015 and
increased by 28% during fiscal 2015 as compared to fiscal 2014. The
decrease in fiscal 2016 compared to fiscal 2015 was the result of
the Company paying lower bonuses, offset by the addition of one
operator, during fiscal 2016. The increase in fiscal 2015 compared
to fiscal 2014 was the result of the Company paying increased
bonuses and the addition of two field personnel during fiscal 2015.
As noted on the bottom line of Table I, salary and salary-related
expenses excluding share-based compensation expenses decreased 13%
during
31
fiscal 2016 compared to fiscal 2015 and
increased 40% during fiscal 2015 compared to fiscal 2014.
Share-based compensation expenses decreased 8% during fiscal 2016
compared to fiscal 2015 as a result of the complete recognition of
options issued to management during fiscal 2013, which occurred
over a period of less than 12 months during fiscal 2016.
Share-based compensation expenses decreased 5% during fiscal 2015
compared to fiscal 2014 as a result of a decrease in the number of
options issued during fiscal 2015 compared to fiscal
2014.
Professional
Fees (mainly legal and accounting fees)
– Professional fees decreased 14%
during fiscal 2016 compared to fiscal 2015 and decreased 73% during
fiscal 2015 compared to fiscal 2014. The decrease during fiscal
2016 compared to fiscal 2015 was primarily the result of decreased
general legal fees. The decrease during fiscal 2015 compared to
fiscal 2014 was primarily the result of settlement of the Land
Board litigation, which decreased legal fees by
$852,000.
Fees
Paid to Our Board of Directors
– Fees for our board in fiscal 2016
include $54,400 for premiums related to our directors and officers
insurance policy (this amount increased by $4,000 from fiscal
2015). The remaining fiscal 2016 fees of $80,000 represent amounts
accrued to our board members for annual service, meeting attendance
fees and travel expenses, which were somewhat lower than in fiscal
2015 due to a decrease in the number of board meetings held in
2016. Fees for our board in fiscal 2015 include $50,500 for
premiums related to our directors and officers insurance policy
(this amount increased by $1,000 from fiscal 2014). The remaining
fiscal 2015 fees of $89,900 represent amounts accrued to our board
members for annual service, meeting attendance fees and travel
expenses, which were higher than in fiscal 2014 due to changing
from expensing annual director fees when paid to expensing annual
director fees ratably throughout the calendar year. Fees paid to
our board of directors in fiscal 2014 include $49,500 for premiums
related to our directors and officers insurance policy. The
remaining $70,900 represent amounts paid to our board members for
annual service, meeting attendance fees and travel
expenses.
Insurance
–
We maintain
policies for general liability insurance, workers compensation
insurance, and casualty insurance to protect our assets. Insurance
expense fluctuates based on the number of employees and premiums
associated with insuring our water systems.
Public
Entity Expenses
–
Costs associated with being a corporation and costs associated with
being a publicly traded entity consist primarily of XBRL and Edgar
conversion fees, stock exchange fees, and press releases. These
costs fluctuate from year to year.
Consulting
Fees –
Consulting
fees for fiscal 2016 consisted of $5,000 for board advisory
services and $700 related to the development of the Sky Ranch water
districts. Consulting fees for fiscal 2015 consisted of $10,000 for
board advisory services, $3,800 related to developing Sky Ranch,
and $4,500 related to the development of the Sky Ranch Districts.
Consulting fees for fiscal 2014 consisted of $9,600 related to the
development of the Sky Ranch Districts and $3,500 in general
consulting fees related to our water rights.
Property
Taxes
– Our 2014
property tax expense included a credit received from the County due
to a reclassification of our Sky Ranch property from commercial to
farm land.
Other
G&A Expenses
–
Other G&A Expenses include typical operating expenses related
to the maintenance of our office, business development, bad debt
charges, travel, and District funding. Other G&A increased 65%
during fiscal 2016 compared to fiscal 2015 and decreased 35% during
fiscal 2015 compared to fiscal 2014. The changes were primarily the
result of the timing of various expenses. As described in greater
detail in Note 14 –
Related Party
Transactions
to the
accompanying financial statements, pursuant to a funding agreement
with the District, we are now accruing the funding to the District
for overhead expenses reimbursable under our agreement into a note,
which decreased our G&A by approximately $114,000 from fiscal
2014 to fiscal 2015.
32
Other Income and Expense Items
|
Table J
- Other Items
|
|||||||
|
|
|
|
|
Change
|
|||
|
|
For the
Fiscal Years Ended August 31,
|
2
016-2015
|
2015-2014
|
||||
|
Other
income items:
|
2016
|
2015
|
2014
|
$
|
%
|
$
|
%
|
|
Oil
and gas lease income, net
|
$
360,800
|
$
645,700
|
$
525,400
|
$
(284,900
)
|
-44
%
|
$
120,300
|
23
%
|
|
Oil
and gas royalty income, net
|
$
343,600
|
$
412,600
|
$
-
|
$
(69,000
)
|
-17
%
|
$
412,600
|
100
%
|
|
Interest
income
|
$
241,300
|
$
21,300
|
$
12,500
|
$
220,000
|
1033
%
|
$
8,800
|
70
%
|
|
Other
|
$
3,900
|
$
22,100
|
$
160,000
|
$
(18,200
)
|
-82
%
|
$
(137,900
)
|
-86
%
|
|
Gain
on extinguishment of contingent
|
|
|
|
|
|
|
|
|
obligations
|
$
-
|
$
-
|
$
832,100
|
$
-
|
0
%
|
$
(832,100
)
|
100
%
|
The $360,800, $645,700, and $525,400 of oil and gas lease payments
recognized in fiscal 2016, fiscal 2015, and fiscal 2014,
respectively, primarily represent the deferred recognition of the
up-front payments received in March 2011 and February 2014, upon
the signing of the O&G Lease and Surface Use Agreement and
related extension. The amounts also represent the up-front payments
received for the Rangeview Lease. On March 10, 2011 we received an
up-front payment of $1,243,400 for the purpose of exploring for,
developing, producing and marketing oil and gas on 634 acres of
mineral estate we own at our Sky Ranch property. The oil and gas
rights under the remaining 304 acres at Sky Ranch were already
owned by a third party. We deferred immediate recognition of the
up-front payment and began recognizing the up-front payment in
income over the initial three-year term of the O&G Lease
beginning March 10, 2011. During February 2014, we received an
additional payment of $1,243,400 to extend the initial term of the
O&G Lease by an additional two years through February 2016. The
income received for the extension was recognized in income over the
two-year extension term of the O&G Lease. As of August 31,
2016, we have deferred recognition of $19,000 of income related to
the Rangeview Lease.
The oil and
gas royalty income represents amounts received pursuant to the
O&G Lease.
The amount
for fiscal 2015 includes royalties from oil production from
commencement of each well through August 15, 2015, which represents
approximately six months of production. The amounts for fiscal 2016
include royalties of each well from August 16, 2015 through August
15, 2016. The first well (referred to as “Sky Ranch” in
the chart below) generated oil and gas royalty revenue of
approximately $266,600 and $321,800, 20% gross (net of taxes),
based on the Company’s 3/8
ths
interest of the total production
of this 1,280-acre pooled mineral estate during the fiscal years
ended August 31, 2016 and 2015, respectively. This 10,000-foot
horizontal well recorded production of approximately 80,400 and
105,000 barrels of oil for the fiscal years ended August 31, 2016
and 2015, respectively. The second well (referred to as
“Property” in the chart below) generated oil and gas
royalty revenue of approximately $77,000 and $90,800, 20% gross
(net of taxes), based on the Company’s 1/8
ths
interest of the total production
of this 1,280-acre pooled mineral estate during the fiscal years
ended August 31, 2016 and 2015, respectively. This 10,000-foot
horizontal well recorded production of approximately 73,400 and
88,600 barrels of oil for the fiscal years ended August 31, 2016
and 2015, respectively.
During fiscal
2014 there were no producing wells. The following charts detail
well production and oil and gas royalties during fiscal 2015 and
fiscal 2016.
33
Interest income represents interest earned
on the temporary investment of capital in cash equivalents or
available-for-sale securities, interest accrued on the notes
receivable from the District and the Sky Ranch District, and
interest accrued on the Special Facilities construction proceeds
receivable from Arapahoe County.
The increase from fiscal 2015 compared to
fiscal 2016 is due to the receipt of interest on investments
related to the proceeds from the sale of our
farms.
Other represents income we received for various easements and the
construction of infrastructure for the oil and gas industry, which
is partially offset by other non-operational expenses.
Gain on extinguishment of contingent obligations resulted from the
relinquishment of the Comprehensive Amendment Agreement No. 1
(“CAA”) interest held by the Land Board in fiscal
2014.
Discontinued Operations
For additional information about our discontinued operations, see
Notes to Consolidated Financial Statements.
The following table provides the components of discontinued
operations:
34
|
Table K - Discontinued Operations Statements of
Operations
|
|||
|
|
|
|
|
|
|
Fiscal years ended August 31,
|
||
|
|
2016
|
2015
|
2014
|
|
Farm
revenues
|
$
267,472
|
$
1,127,155
|
$
1,068,026
|
|
Farm
expenses
|
(77,132
)
|
(126,279
)
|
(88,105
)
|
|
Gross profit
|
190,340
|
1,000,876
|
979,921
|
|
|
|
|
|
|
General
and administrative expenses
|
(313,389
)
|
(760,192
)
|
(911,230
)
|
|
Impairment
of land and water rights held for sale
|
-
|
-
|
(402,657
)
|
|
Operating (loss) profit
|
(123,049
)
|
240,684
|
(333,966
)
|
|
Finance
charges
|
38,428
|
21,710
|
14,392
|
|
(Loss)
gain on sale of farm assets
|
4,273
|
(22,108,145
)
|
1,407,326
|
|
Interest
expense (1)
|
-
|
(390,505
)
|
(239,200
)
|
|
Interest
imputed on the Tap Participation
|
|
|
|
|
Fee payable to HP A&M (2)
|
-
|
(23,816
)
|
(1,445,509
)
|
|
Loss from discontinued operations
|
$
(80,348
)
|
$
(22,260,072
)
|
$
(596,957
)
|
(1)
Interest expense represents interest accrued related to notes we
had on our farm assets prior to the sale. All notes associated with
the farms have been paid off, and as a result we no longer incur
interest on such notes.
(2)
Imputed interest represents an estimate of the interest accrued on
the Tap Participation Fee payable to HP A&M, which was
eliminated as a result of the settlement with HP A&M during the
three months ended February 28, 2015. As a result, we stopped
accruing interest related to the Tap Participation Fee on that
date.
We anticipate continued expenses through the end of calendar 2016
related to the discontinued operations. We will continue to receive
revenues for leased agricultural land and incur expenses related to
the remaining agricultural land we own and for the purpose of
collecting outstanding receivables. We are in the process of
selling the remaining farms that we acquired during fiscal
2016.
Liquidity, Capital Resources and Financial Position
At August 31, 2016, our working capital, defined as current assets
less current liabilities, was $28.6 million, which includes $4.7
million in cash and cash equivalents. We believe that as of the
date of the filing of this annual report on Form 10-K and as of
August 31, 2016, we have sufficient working capital to fund our
operations for the next fiscal year.
ECCV
Capacity Operating System –
Pursuant to a 1982 contractual right, the
District may purchase water produced from the ECCV Land Board
system, which is comprised of eight wells and more than 10 miles of
buried water pipeline located on the Lowry Range. In May 2012, in
order to increase the delivery capacity and reliability of these
wells, in our capacity as the District’s service provider and
the Export Water Contractor (as defined in the Lease Agreement
among us, the District and the Land Board), we entered into an
agreement to operate and maintain the ECCV facilities, allowing us
to utilize the system to provide water to commercial and industrial
customers, including customers providing water for drilling and
hydraulic fracturing of oil and gas wells. Our costs associated
with the use of the ECCV system are a flat monthly fee of $8,000
per month from January 1, 2013 through December 31, 2020, and will
decrease to $3,000 per month from January 1, 2021 through April
2032. Additionally, we pay a fee per 1,000 gallons of water
produced from ECCV’s system, which is included in the water
usage fees charged to customers. In addition, the ECCV system costs
us approximately $1,900 per month to maintain.
South
Metropolitan Water Supply Authority and WISE –
SMWSA is a municipal water
authority in the State of Colorado organized to pursue the
acquisition and development of new water supplies on behalf of its
members, including the District. Pursuant to the SMWSA
Participation Agreement with the District, we agreed to provide
funding to the District in connection with its membership in the
SMWSA. During the fiscal years ended August 31, 2016, 2015 and
2014, we provided $113,600, $78,600 and $114,900, respectively, of
funding to the District pursuant to the SMWSA Participation
Agreement. In July 2013, the District together with nine other
SMWSA members formed an entity to enable its members to participle
in WISE and entered into an agreement that
specifies
35
each member’s pro rata share of WISE
and the members’ rights and obligations with respect to WISE.
On December 31, 2013, SMWA, Denver Water and Aurora Water
entered into the WISE Partnership Agreement, which provides for the
purchase of certain infrastructure (pipelines, water storage
facilities, water treatment facilities, and other appurtenant
facilities) to deliver water to and among the 10 members of the
SMWA, Denver Water and Aurora Water. We have entered into the WISE
Financing Agreement, which obligates us to fund the
District’s cost of participating in WISE. In exchange for
funding the District’s obligations in WISE, we will have the
sole right to use and reuse the District’s 7% share of the
WISE water and infrastructure to provide water service to the
District’s customers and to receive the revenue from such
service. Upon completion of the WISE infrastructure in 2017, we
expect to be entitled to approximately 3 million gallons per
day of transmission pipeline capacity and 500 acre feet per year of
water.
In addition to
the funding we have provided to the District pursuant to the SMWSA
Participation Agreement, to date we have provided approximately
$2.9 million of financing to the District to fund its obligation to
finance the purchase of infrastructure for WISE and the
construction of a connection to the WISE system in accordance with
the WISE Financing Agreement.
We anticipate that we will be spending
approximately $650,000 in this system during fiscal 2017 and $5
million during the next four years to fund the District’s
purchase of its share of the water transmission line and additional
facilities, water and related assets for WISE.
Summary Cash Flows Table
|
Table L - Summary Cash Flows
|
|||||||
|
|
|
|
|
Change
|
|||
|
|
For the Fiscal Years Ended August
31,
|
2016-2015
|
2015-2014
|
||||
|
|
2016
|
2015
|
2014
|
$
|
%
|
$
|
%
|
|
Cash (used)
provided by:
|
|
|
|
|
|
|
|
|
Operating acitivites
|
$
(270,700
)
|
$
(974,100
)
|
$
51,700
|
$
703,400
|
72
%
|
$
(1,025,800
)
|
-1984
%
|
|
Investing activities
|
$
(32,119,000
)
|
$
42,531,700
|
$
2,136,300
|
$
(74,650,700
)
|
-176
%
|
$
40,395,400
|
1891
%
|
|
Financing activities
|
$
(2,000
)
|
$
(6,218,200
)
|
$
(2,886,900
)
|
$
6,216,200
|
100
%
|
$
(3,331,300
)
|
115
%
|
Changes
in Operating Activities –
Operating activities include revenues we
receive from the sale of wholesale water and wastewater services,
costs incurred in the delivery of those services, G&A Expenses,
and depletion/depreciation expenses.
Cash used by operations in fiscal 2016 decreased by $703,400
compared to fiscal 2015, which was primarily the result of
receiving the remaining escrow from the sale of our farms of
approximately $1.3 million. Cash used by operations in fiscal 2015
increased by $1,025,700 compared to fiscal 2014, which was
primarily the result of us not receiving a fee for renewal of the
O&G lease in fiscal 2015, which accounted for approximately
$1.3 million in fiscal 2014.
We will continue to provide wholesale domestic water and wastewater
services to customers in our service areas, and we will continue to
operate and maintain our water and wastewater systems with our own
employees.
Changes
in Investing Activities
–
Investing activities in fiscal
2016 consisted of the investments in our water and wastewater
systems and land of approximately $1.2 million, the purchase of
equipment of approximately $472,300, and the net investment of
approximately $30 million into U.S. treasuries and certificates of
deposit.
Investing activities in fiscal 2015
consisted of the sale of our farms, which generated proceeds of
approximately $44.6 million, and the addition of approximately $2.1
million in water assets, which primarily consisted of the
investment in WISE of approximately $2.5 million ($1.4 million
acquired through the WISE Financing Agreement) and the addition of
pipelines and other water infrastructure of approximately $1
million. Investing activities in fiscal 2014 consisted of the sale
of some of our farms and easements on our land, which generated
$5.8 million and the addition of approximately $3.9 million in
water assets, which primarily consisted of the addition of three
wells to our system.
Changes
in Financing Activities
–
Financing activities in fiscal
2016 consisted only of payments to our contingent liability holders
of approximately $2,000. Financing activities in fiscal 2015
consisted primarily of payments on our promissory notes of $8.9
million (which includes funding of the WISE Financing Agreement
entered into in December 2014) and the issuance of approximately
$2.7 million in new promissory notes. Financing activities in
fiscal 2014 consisted primarily of payments on our promissory notes
of $2.9 million.
36
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist
entirely of the contingent portion of the CAA which is $677,500, as
described in Note 5 –
Participating Interests
in Export Water
to the
accompanying financial statements. The contingent liability is not
reflected on our balance sheet because the obligation to pay the
CAA is contingent on sales of Export Water, the amounts and timing
of which are not reasonably determinable.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 –
Summary of Significant
Accounting Policies
to
the accompanying financial statements for recently adopted and
issued accounting pronouncements.
Total Contractual Cash Obligations
|
Table M - Contractual Cash Obligations
|
|||||
|
|
|
Payments due by period
|
|||
|
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
More than 5 years
|
|
Operating lease obligations (a)
|
$
12,000
|
$
12,000
|
(a)
|
(a)
|
(a)
|
|
Participating Interests in Export Water (b)
|
344,000
|
(b)
|
(b)
|
(b)
|
(b)
|
|
WISE participation (c)
|
5,642,200
|
649,100
|
3,960,800
|
1,032,300
|
(c)
|
|
Total
|
$
5,998,200
|
$
661,100
|
$
3,960,800
|
$
1,032,300
|
$
-
|
(a)
Our only operating lease is related to our office space. We occupy
2,500 square feet at a cost of $3,000, per month, at the address
shown on the cover of this Form 10-K. We lease these premises
pursuant to a one-year operating lease agreement which expires in
December 2016 with a third party.
(b)
The participating interests liability is payable to the CAA holders
upon the sale of Export Water; therefore, the timing of the
payments is uncertain and not reflected in the above table by
period.
(c)
Projections for WISE participation have only been provided for the
next five fiscal years. The timing and amount of payments beyond
five years is uncertain and not reflected in the above table by
period.
General
We have limited exposure to market risks from instruments that may
impact our balance sheets, statements of operations, and statements
of cash flows. Such exposure is due primarily to changing interest
rates.
Interest Rates
The primary objective for our investment
activities is to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing in
diversified short-term interest bearing investments. As of August
31, 2016, we are holding $30 million in marketable securities
consisting of
certificates
of deposit and U.S. treasury notes
. We have no investments denominated in
foreign country currencies; therefore, our investments are not
subject to foreign currency exchange rate risk.
37
Index to Consolidated Financial Statements and Supplementary
Data
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting
Firm
|
F-1
|
|
Consolidated Balance Sheets
|
F-2
|
|
Consolidated Statements of Operations
|
F-3
|
|
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income (Loss)
|
F-4
|
|
Consolidated Statements of Cash Flows
|
F-5
|
|
Notes to Consolidated Financial Statements
|
F-6
|
|
|
|
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and Shareholders
Pure Cycle Corporation
We have audited the accompanying
consolidated balance sheets of Pure Cycle Corporation as of August
31, 2016 and 2015, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended
August 31, 2016. We also have audited Pure Cycle
Corporation’s internal control over financial reporting as of
August 31, 2016, based on criteria established in
Internal
Control—Integrated Framework 2013
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Pure Cycle
Corporation's management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on
these financial statements and an opinion on Pure Cycle
Corporation’s internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Pure Cycle Corporation as of
August 31, 2016 and 2015, and the results of its operations and its
cash flows for each of the years in the three-year period ended
August 31, 2016 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, Pure
Cycle Corporation maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2016,
based on criteria established in
Internal
Control—Integrated Framework 2013
issued by the Committee of Sponsoring
Organizations of the Treadway Commission
(COSO).
/s/ GHP HORWATH, P.C
Denver, Colorado
October 27, 2016
F-1
PURE
CYCLE CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
ASSETS:
|
August 31, 2016
|
August 31, 2015
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
4,697,288
|
$
37,089,041
|
|
Short-term investments
|
23,176,450
|
–
|
|
Trade accounts receivable, net
|
181,006
|
157,845
|
|
Sky Ranch receivable
|
–
|
148,415
|
|
Prepaid expenses
|
350,819
|
228,086
|
|
Assets of discontinued operations
|
680,287
|
1,957,552
|
|
Total current assets
|
29,085,850
|
39,580,939
|
|
|
|
|
|
Long-term investments
|
6,853,276
|
–
|
|
Investments in water and water systems, net
|
28,321,926
|
27,708,595
|
|
Land and mineral interests
|
5,345,800
|
5,091,668
|
|
Notes receivable - related parties, including accrued
interest
|
800,369
|
591,223
|
|
Other assets
|
472,393
|
88,488
|
|
Total assets
|
$
70,879,614
|
$
73,060,913
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
160,390
|
172,634
|
|
Accrued liabilities
|
242,624
|
499,808
|
|
Income taxes
|
–
|
292,729
|
|
Deferred revenues
|
55,800
|
55,800
|
|
Deferred oil and gas lease payment
|
19,000
|
360,765
|
|
Liabilities of discontinued operations
|
4,394
|
117,329
|
|
Total current liabilities
|
482,208
|
1,499,065
|
|
|
|
|
|
Deferred revenues, less current portion
|
1,055,491
|
1,111,293
|
|
Deferred oil and gas lease payment, less current
portion
|
–
|
19,000
|
|
Participating Interests in Export Water Supply
|
343,966
|
346,007
|
|
Total liabilities
|
1,881,665
|
2,975,365
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
Preferred stock:
|
|
|
|
Series B - par value $.001 per share, 25 million shares
authorized;
|
433
|
433
|
|
432,513 shares issued and outstanding (liquidation preference of
$432,513)
|
|
|
|
Common stock:
|
|
|
|
Par value 1/3 of $.01 per share, 40 million shares
authorized;
|
|
|
|
23,754,098 and 24,054,098 shares issued and outstanding,
respectively
|
79,185
|
80,185
|
|
Collateral stock
|
–
|
(1,407,000
)
|
|
Additional paid in capital
|
171,198,241
|
172,384,355
|
|
Accumulated other comprehensive income
|
3,122
|
–
|
|
Accumulated deficit
|
(102,283,032
)
|
(100,972,425
)
|
|
Total shareholders' equity
|
68,997,949
|
70,085,548
|
|
Total liabilities and shareholders' equity
|
$
70,879,614
|
$
73,060,913
|
F-2
PURE
CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the
Fiscal Years Ended August 31,
|
||
|
|
2016
|
2015
|
2014
|
|
Revenues:
|
|
|
|
|
Metered water usage
|
$
220,997
|
$
969,989
|
$
1,879,495
|
|
Wastewater treatment fees
|
43,712
|
50,076
|
45,400
|
|
Special facility funding recognized
|
41,508
|
41,508
|
41,508
|
|
Water tap fees recognized
|
14,294
|
14,294
|
14,294
|
|
Other income
|
131,650
|
120,702
|
42,417
|
|
Total revenues
|
452,161
|
1,196,569
|
2,023,114
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Water service operations
|
(264,424
)
|
(464,940
)
|
(547,562
)
|
|
Wastewater service operations
|
(29,187
)
|
(66,745
)
|
(38,426
)
|
|
Other
|
(68,478
)
|
(55,173
)
|
(39,421
)
|
|
Depletion and depreciation
|
(166,670
)
|
(172,546
)
|
(149,757
)
|
|
Total cost of revenues
|
(528,759
)
|
(759,404
)
|
(775,166
)
|
|
Gross
margin
|
(76,598
)
|
437,165
|
1,247,948
|
|
|
|
|
|
|
General
and administrative expenses
|
(1,849,743
)
|
(1,939,395
)
|
(2,445,633
)
|
|
Depreciation
|
(253,434
)
|
(174,717
)
|
(46,807
)
|
|
Operating loss
|
(2,179,775
)
|
(1,676,947
)
|
(1,244,492
)
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
Oil and gas lease income, net
|
360,765
|
645,720
|
525,438
|
|
Oil and gas royalty income, net
|
343,620
|
412,627
|
–
|
|
Interest income
|
241,279
|
21,334
|
12,466
|
|
Other
|
3,852
|
22,120
|
160,004
|
|
Gain on extinguishment of contingent obligations
|
–
|
–
|
832,097
|
|
(Loss) income from continuing operations
|
(1,230,259
)
|
(575,146
)
|
285,513
|
|
Net loss from discontinued operations, net of taxes
|
(80,348
)
|
(22,552,801
)
|
(596,957
)
|
|
Net loss before taxes
|
(1,310,607
)
|
(23,127,947
)
|
(311,444
)
|
|
Taxes
|
–
|
-
|
–
|
|
Net loss
|
$
(1,310,607
)
|
$
(23,127,947
)
|
$
(311,444
)
|
|
Unrealized holding gains
|
3,122
|
–
|
–
|
|
Total comprehensive loss
|
$
(1,307,485
)
|
$
(23,127,947
)
|
$
(311,444
)
|
|
|
|
|
|
|
Basic and diluted net (loss) income per common share
-
|
|
|
|
|
(Loss) income from continuing operations
|
$
(0.06
)
|
$
(0.03
)
|
$
0.01
|
|
Loss from discontinued operations
|
*
|
$
(0.93
)
|
$
(0.02
) |
|
Net loss
|
$
(0.06
)
|
$
(0.96
)
|
$
(0.01
)
|
|
|
|
|
|
|
Weighted average common shares outstanding –
|
|
|
|
|
basic and diluted
|
23,781,041
|
24,041,114
|
24,037,598
|
|
|
|
|
|
|
* Amount is less than $.01 per share
|
|
|
|
See
accompanying Notes to Financial Statements
F-3
PURE
CYCLE CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
|
Preferred
Stock
|
Common Stock
|
Additional
Paid-In
|
Accumulated
Other
Comprhensive
Income |
Collateral
|
Accumulated
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(loss)
|
Stock
|
Deficit
|
Total
|
|
August 31,
2013 balance:
|
432,513
|
$
433
|
24,037,598
|
$
80,130
|
$
115,224,946
|
$
-
|
$
-
|
$
(77,533,034
)
|
$
37,772,475
|
|
Share-based
compensation
|
-
|
-
|
-
|
-
|
251,915
|
|
|
|
251,915
|
|
Reduction
in TPF due to remedies under
|
|
|
|
|
|
|
|
|
|
|
the
Arkansas River Agreement
|
-
|
-
|
-
|
-
|
53,317,535
|
-
|
-
|
-
|
53,317,535
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(311,444
)
|
(311,444
)
|
|
August 31,
2014 balance:
|
432,513
|
433
|
24,037,598
|
80,130
|
168,794,396
|
-
|
-
|
(77,844,478
)
|
91,030,481
|
|
Share-based
compensation
|
-
|
-
|
-
|
-
|
239,986
|
-
|
-
|
-
|
239,986
|
|
Exercise of
options
|
-
|
-
|
16,500
|
55
|
48,770
|
-
|
-
|
-
|
48,825
|
|
Reduction
in TPF due to remedies under
|
|
|
|
|
|
|
|
|
|
|
the
Arkansas River Agreement
|
-
|
-
|
-
|
-
|
3,301,203
|
-
|
-
|
-
|
3,301,203
|
|
Collateral
stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,407,000
)
|
-
|
(1,407,000
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(23,127,947
)
|
(23,127,947
)
|
|
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
|
-
|
-
|
-
|
-
|
219,886
|
-
|
-
|
-
|
219,886
|
|
Collateral
stock retired
|
-
|
-
|
(300,000
)
|
(1,000
)
|
(1,406,000
)
|
-
|
1,407,000
|
-
|
-
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,310,607
)
|
(1,310,607
)
|
|
Unrealized
holding gain on investments
|
-
|
-
|
-
|
-
|
-
|
3,122
|
-
|
-
|
3,122
|
|
August 31,
2016 balance:
|
432,513
|
$
433
|
23,754,098
|
$
79,185
|
$
171,198,241
|
$
3,122
|
$
-
|
$
(102,283,032
)
|
$
68,997,949
|
See
accompanying Notes to Financial Statements
F-4
PURE
CYCLE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the
fiscal Years Ended August 31,
|
||
|
|
2016
|
2015
|
2014
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
loss
|
$
(1,310,607
)
|
$
(23,127,947
)
|
$
(311,444
)
|
|
Adjustments
to reconcile net loss to net cash provided by
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
Share-based
compensation expense
|
219,886
|
239,986
|
251,915
|
|
Depreciation,
depletion and other non-cash items
|
420,104
|
347,263
|
196,564
|
|
Investment
in Well Enhancement and Recovery Systems LLC
|
10,675
|
4,577
|
(37,193
)
|
|
Interest
income and other non-cash items
|
(41,114
)
|
(419
)
|
(420
)
|
|
Interest
added to receivable from related parties
|
(29,099
)
|
(15,493
)
|
(12,039
)
|
|
Gain
on extinguishment of contingent obligations
|
-
|
-
|
(832,097
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
Trade
accounts receivable
|
(23,161
)
|
918,252
|
(1,041,288
)
|
|
Prepaid
expenses
|
(122,733
)
|
43,472
|
(168,795
)
|
|
Note
receivable - related parties
|
(31,633
)
|
(105,208
)
|
6,388
|
|
Accounts
payable and accrued liabilities
|
(269,428
)
|
(848,669
)
|
1,191,298
|
|
Income
taxes
|
(292,729
)
|
292,729
|
-
|
|
Deferred
revenue
|
(55,802
)
|
(64,226
)
|
(65,385
)
|
|
Deferred
income - oil and gas lease
|
(360,765
)
|
(645,720
)
|
790,002
|
|
Net
cash used in operating activities from continuing
operations
|
(1,886,406
)
|
(22,961,403
)
|
(32,494
)
|
|
Net
cash provided by operating activities from discontinued
operations
|
1,615,677
|
21,987,337
|
84,238
|
|
Net
cash provided by (used in) operating activities
|
(270,729
)
|
(974,066
)
|
51,744
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
Investments
in water, water systems and land
|
(1,209,416
)
|
(2,101,253
)
|
(3,864,443
)
|
|
Sales
and maturities of marketable securities
|
2,840,000
|
-
|
-
|
|
Purchase
of short-term investments
|
(25,970,721
)
|
-
|
-
|
|
Purchase
of long-term investments
|
(6,855,189
)
|
-
|
-
|
|
Proceeds
from sale of land and easements
|
-
|
-
|
192,851
|
|
Purchase
of property and equipment
|
(472,310
)
|
(17,186
)
|
(3,370
)
|
|
Net
cash used in investing activities from continuing
operations
|
(31,667,636
)
|
(2,118,439
)
|
(3,674,962
)
|
|
Net
cash provided by (used in) investing activities from discontinued
operations
|
(451,347
)
|
44,650,149
|
5,811,265
|
|
Net
cash provided by (used in) investing activities
|
(32,118,983
)
|
42,531,710
|
2,136,303
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
Proceeds
from exercise of options
|
-
|
48,825
|
-
|
|
Payment
to contingent liability holders
|
(2,041
)
|
(8,621
)
|
(6,185
)
|
|
Net
cash (used in) provided by financing activities from continuing
operations
|
(2,041
)
|
40,204
|
(6,185
)
|
|
Net
cash used in financing activities from discontinued
operations
|
-
|
(6,258,365
)
|
(2,880,667
)
|
|
Net
cash used in financing activities
|
(2,041
)
|
(6,218,161
)
|
(2,886,852
)
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
(32,391,753
)
|
35,339,483
|
(698,805
)
|
|
Cash
and cash equivalents - beginning of year
|
37,089,041
|
1,749,558
|
2,448,363
|
|
Cash
and cash equivalents - end of year
|
$
4,697,288
|
$
37,089,041
|
$
1,749,558
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
Retirement
of collateral stock
|
$
1,407,000
|
$
-
|
$
-
|
|
Reduction
in Tap Participation Fee liability resulting from
|
|
|
|
|
remedies
under the Arkansas River Agreement
|
$
-
|
$
-
|
$
53,317,500
|
|
Reduction
in Tap Participation Fee liability and HP A&M
|
|
|
|
|
receivable,
collateral stock, and mineral interests received
|
|
|
|
|
as a
result of settlement of the Arkansas River Agreement
|
$
-
|
$
1,894,203
|
$
-
|
|
Assets
acquired through WISE funding obligation
|
$
-
|
$
1,381,004
|
$
-
|
See
accompanying Notes to Financial Statements
F-5
PURE
CYCLE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Pure Cycle Corporation (the “Company”) was incorporated
in Delaware in 1976 and reincorporated in Colorado in 2008. The
Company owns assets in the Denver, Colorado metropolitan area. The
Company is currently using its water assets located in the Denver
metropolitan area to provide wholesale water and wastewater
services to customers located in the Denver metropolitan
area.
The Company provides a full line of wholesale water and wastewater
services which includes designing and constructing water and
wastewater systems as well as operating and maintaining such
systems. The Company’s business focus is to provide wholesale
water and wastewater services, predominately to local governmental
entities, which provide services to their end-use customers
throughout the Denver metropolitan area as well as along the
Colorado Front Range.
The Company believes it has sufficient working capital and
financing sources to fund its operations for at least the next
fiscal year. As of August 31, 2016, the Company had $4.7 million of
cash and cash equivalents and $28.6 million of working
capital.
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Pure Cycle Corporation and its majority-owned and
controlled subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. 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 fiscal year ended August 31, 2016, the
Company’s main operating account exceeded federally insured
limits. The Company has never suffered a loss due to such excess
balance.
Investments
M
anagement determines the appropriate
classification of its investments in certificates of deposit and
debt and equity securities at the time of purchase and reevaluates
such determinations each reporting period.
Certificates of deposit and debt securities
are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. The
Company has $6.9 million of investments classified as
held-to-maturity at August 31, 2016 which represent certificates of
deposit and U.S. treasury notes with maturity dates after August
31, 2017. Debt securities for which the Company does not have the
positive intent or ability to hold to maturity are classified as
available-for-sale, along with any investments in equity
securities. Securities classified as available-for-sale are
marked-to-market at each reporting period. Changes in value on such
securities are recorded as a component of
Accumulated other
comprehensive income (loss).
The cost of securities sold is based on the
specific identification method. The Company’s certificates of
deposit and debt securities mature at various dates through July
23, 2018.
Concentration of Credit Risk and Fair Value
F-6
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and investments. From time to time, the Company places
its cash in money market instruments, commercial paper obligations,
corporate bonds and U.S. government treasury obligations. To date,
the Company has not experienced significant losses on any of these
investments.
The
following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is
practicable to estimate that value.
Cash and Cash Equivalents
–
The Company’s cash and cash equivalents are
reported using the values as reported by the financial institution
where the funds are held. These securities primarily include
balances in the Company’s operating and savings accounts. The
carrying amount of cash and cash equivalents approximate fair
value.
Trade Accounts Receivable
–
The Company records accounts receivable net of
allowances for uncollectible accounts.
Investments –
The carrying amounts of investments approximate fair value.
Investments are described further in Note 3 –
Fair Value Measurements.
Accounts Payable
–
The carrying amounts of accounts payable approximate
fair value due to the relatively short period to maturity for these
instruments.
Long-Term Financial
Liabilities
–
The Comprehensive Amendment Agreement No. 1 (the “CAA”)
is comprised of a recorded balance and an off-balance sheet or
“contingent” obligation associated with the
Company’s acquisition of its “Rangeview Water
Supply” (defined in Note 4 –
Water and Land Assets
). The amount
payable is a fixed amount but is repayable only upon the sale of
“Export Water” (defined in Note 4 –
Water and Land Assets
).
Because of the uncertainty of the sale of Export Water, the Company
has determined that the recorded balance of the CAA does not have a
determinable fair value. The CAA is described further in
Note 5 –
Participating Interests in Export
Water
.
Notes Receivable –
Related Parties
–
The market value of the notes
receivable – related parties: 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 5 –
Participating Interests in Export
Water
.
Cash Flows
The Company did not pay any interest during the fiscal year ended
August 31, 2016. The Company paid $441,400 and $310,400 in interest
during the fiscal years ended August 31, 2015 and 2014,
respectively.
In the fiscal year ended August 31, 2016, the Company paid $292,700
for alternative minimum tax the Company owed as a result of the
sale of the Company’s farm assets. The Company did not pay
any income taxes during the fiscal years ended August 31, 2015 and
2014.
Trade Accounts Receivable
The Company records accounts receivable net of allowances for
uncollectible accounts. Excluded in trade accounts receivable are
balances due from discontinued operations. The Company has not
recorded an allowance for uncollectible accounts in receivables
from continuing operations for either of the periods ended August
31, 2016 or 2015. The allowance for uncollectible accounts was
determined based on specific review of all past due
accounts.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected
to be generated by the eventual use of the asset. If such assets
are considered to be impaired, the impairment to be
F-7
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 Depreciation
and Depletion Charges
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 water assets that are being utilized on
the basis of units produced (i.e., thousands of gallons sold)
divided by the total volume of water adjudicated in the water
decrees.
Revenue Recognition
The Company generates revenues through one line of business. Its
revenues are derived through its wholesale water and wastewater
business, which is described below.
The Company generates revenues through its wholesale water and
wastewater business predominately from three sources: (i) monthly
wholesale water usage fees and wastewater service fees, (ii)
one-time water and wastewater tap fees and construction fees, and
(iii) consulting fees. Because these items are separately
delivered, the Company accounts for each of the items separately,
as described below.
i.
Monthly
wholesale water and wastewater service 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
assessed per single family equivalent (“SFE”) unit
served. One SFE is a customer, whether residential, commercial or
industrial, that imparts a demand on the Company’s water or
wastewater systems similar to the demand of a family of four
persons living in a single family house on a standard sized lot.
One SFE is assumed to have a water demand of approximately 0.4 acre
feet per year and to contribute wastewater flows of approximately
300 gallons per day. Water usage pricing uses a tiered pricing
structure. The Company recognizes wholesale water usage revenues
upon delivering water to its customers or its governmental
customers’ end-use customers, as applicable.
Revenues
recognized by the Company from the sale of "Export Water" are shown
gross of royalties to the State of Colorado Board of Land
Commissioners (the “Land Board”). Revenues recognized
by the Company from the sale of water on the "Lowry Range" are
shown net of royalties paid to the Land Board and amounts retained
by the
Rangeview
Metropolitan District (the “District”). See further
description of "Export Water" and the "Lowry Range" in Note 4 -
Water and Land Assets
under
"Rangeview Water Supply and Water
System."
The Company recognizes wastewater processing revenues monthly based
on usage. The monthly wastewater service fees are shown net of
amounts retained by the District. Amounts recognized for water and
wastewater services during the fiscal years ended August 31, 2016,
2015 and 2014 are presented in the statements of operations. Costs
of delivering water and providing wastewater service to customers
are recognized as incurred.
The Company delivered
33.9
million,
97.5 million and 190.1 million gallons of water to customers during
the fiscal years ended August 31, 2016, 2015 and 2014,
respectively.
ii.
Water and
wastewater tap fees and construction fees
–
Tap
fees, also called system development fees, are received in advance,
are non-refundable and are typically used to fund construction of
certain facilities and defray the acquisition costs of obtaining
water rights. Construction fees are fees used by the Company to
construct assets that are typically required to be constructed by
developers or home builders and are separate from tap
fees.
Proceeds from tap fees and construction fees are deferred upon
receipt and recognized in income either upon completion of
construction of infrastructure or ratably over time, depending on
whether the Company owns the infrastructure constructed with the
proceeds or a customer owns the infrastructure constructed with the
proceeds.
F-8
Tap and construction fees derived from agreements in which the
Company will not own the assets constructed with the fees are
recognized as revenue using the percentage-of-completion method.
Costs of construction of the assets when the Company will not own
the assets are recorded as construction costs.
Tap and construction fees derived from agreements for which the
Company will own the infrastructure are recognized as revenues
ratably over the estimated accounting service life of the
facilities constructed, starting at completion of construction,
which could be in excess of 30 years. Costs of construction of the
assets when the Company will own the assets are capitalized and
depreciated over their estimated economic lives.
From time to time, the Company enters into water service agreements
to provide water service to customers. The Company owns the
facilities which store, treat, and deliver the water and amortizes
the cost of these facilities over their useful lives. The Company
recognized $14,300 of tap fee revenue in each of the three fiscal
years ended August 31, 2016, 2015 and 2014. The Company recognized
$41,500 of “Special Facilities” funding as revenue in
each of the three fiscal years ended August 31, 2016, 2015, and
2014. As of August 31, 2016, the Company has deferred recognition
of $1.1 million of tap and construction revenue from customer
agreements, which will be recognized as revenue ratably through
2036.
iii.
Consulting
fees
– Consulting
fees are fees the Company receives, typically on a monthly basis,
from municipalities and area water providers along the I-70
corridor, for contract operations services.
Royalty and Other Obligations
Revenues from the sale of Export Water are
shown gross of royalties payable to the Land Board. Revenues from
the sale of water on the Lowry Range are shown net of the royalties
to the Land Board and the amounts retained by the District.
Oil and Gas Lease Payments
As further described in Note 4
–
Water and Land
Assets
below, 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. Pursuant to the O&G Lease, on
March 10, 2011, the Company received an up-front payment of
$1,243,400 from Anadarko for the purpose of exploring for,
developing, producing and marketing oil and gas on approximately
634 acres of mineral estate owned by the Company at its Sky Ranch
property. In December 2012, the O&G Lease was purchased by a
wholly owned subsidiary of ConocoPhillips Company. 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). In
addition, during the fiscal years ended August 31, 2015 and 2014,
the Company received up-front payments of $72,000 and $12,540,
respectively, 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 recognizes the up-front payments on a
straight-line basis over the terms of the respective leases. During
the fiscal years ended August 31, 2016, 2015 and 2014, the Company
recognized $360,800, $645,700, and $525,400, respectively, of
income related to the up-front payments received pursuant to these
leases.
As of August 31, 2016, the Company has deferred recognition of
$19,000 of income related to the Rangeview Lease, which will be
recognized as 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 fiscal years ended
August 31, 2016 and 2015, the Company receiv
ed $343,600 and $412,600,
respectively, in royalties
attributable to these two wells.
F-9
Share-based Compensation
The Company maintains a stock option plan for the benefit of its
employees and directors. The Company records share-based
compensation costs which are measured at the grant date based on
the fair value of the award and are recognized as expense over the
applicable vesting period of the stock award using the
straight-line method. 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 during the fiscal years
ended August 31, 2016 and 2015 had no impact on the income tax
provisions.
The Company recognized $219,900, $240,000,
and $251,900 of share-based compensation expenses during the
fiscal
years
ended August 31, 2016, 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 does not have any significant unrecognized
tax benefits as of August 31, 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 2012 through fiscal 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 August 31, 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 fiscal
years ended August 31, 2016, 2015 or 2014.
Discontinued Operations
In August 2015, the Company sold approximately 14,600 acres of
irrigated farm land and related Arkansas River water rights, which
were substantially all of the assets comprising the Company’s
agricultural segment. Pursuant to the terms of the purchase and
sale agreement, the Company continued to manage and receive the
lease income until December 31, 2015. As a consequence of the
sale, the operating results and the assets and liabilities of the
discontinued operations, which formerly comprised the agricultural
segment, are presented separately in the Company’s
consolidated financial statements. Summarized financial information
for the discontinued agricultural business is shown below. Prior
period balances have been reclassified to present the operations of
the agricultural business as a discontinued operation.
|
Discontinued Operations Statements of Operations
|
|||
|
|
|
|
|
|
|
Fiscal years ended August 31,
|
||
|
|
2016
|
2015
|
2014
|
|
Farm revenues
|
$
267,472
|
$
1,127,155
|
$
1,068,026
|
|
Farm expenses
|
(77,132
)
|
(126,279
)
|
(88,105
)
|
|
Gross profit
|
190,340
|
1,000,876
|
979,921
|
|
|
|
|
|
|
General and administrative expenses
|
(313,389
)
|
(760,192
)
|
(911,230
)
|
|
Impairment of land and water rights held for sale
|
-
|
-
|
(402,657
)
|
|
Operating (loss) profit
|
(123,049
)
|
240,684
|
(333,966
)
|
|
Finance charges
|
38,428
|
21,710
|
14,392
|
|
(Loss) gain on sale of farm assets
|
4,273
|
(22,108,145
)
|
1,407,326
|
|
Interest expense (1)
|
-
|
(390,505
)
|
(239,200
)
|
|
Interest imputed on the Tap Participation
|
|
|
|
|
Fee payable to HP A&M (2)
|
-
|
(23,816
)
|
(1,445,509
)
|
|
Taxes
|
-
|
(292,729
)
|
-
|
|
Loss from discontinued operations, net of
taxes
|
$
(80,348
)
|
$
(22,552,801
)
|
$
(596,957
)
|
F-10
(1) Interest
expense represents interest accrued related to notes the Company
had on its farm assets prior to the sale. All notes associated with
the farms have been paid off, and as a result the Company no longer
incurs interest on such notes.
(2)
Imputed interest represents an estimate of the interest accrued on
the Tap Participation Fee payable to High Plains A&M, LLC
(“HP A&M”), which was eliminated as a result of the
settlement with HP A&M during the three months ended February
28, 2015. As a result, the Company no longer accrues interest
related to the Tap Participation Fee.
The Company anticipates continued expenses through the end of
calendar 2016 related to the discontinued operations. The Company
will continue to incur expenses 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 operations” and “Liabilities of
discontinued operations” in the consolidated balance sheets.
The carrying amounts of the major classes of assets and liabilities
included part of the discontinued business are presented in the
following table:
|
|
||
|
|
|
|
|
|
August 31,
|
|
|
|
2016
|
2015
|
|
Assets:
|
|
|
|
Trade accounts receivable
|
$
227,060
|
$
549,993
|
|
Escrow receivable
|
-
|
1,342,250
|
|
Land held for sale (1)
|
450,347
|
-
|
|
Prepaid expenses
|
2,880
|
65,309
|
|
Total assets
|
$
680,287
|
$
1,957,552
|
|
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable
|
$
-
|
$
25,704
|
|
Accrued liabilities
|
4,394
|
90,725
|
|
Deferred revenues
|
-
|
900
|
|
Total liabilities
|
$
4,394
|
$
117,329
|
(1)
Land
Held for Sale.
During the
fiscal quarter ended November 30, 2015, the Company purchased three
farms totaling 700 acres for approximately $450,300. The farms were
acquired to correct dry-up covenant issues related to water only
farms to 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.
Loss per Common Share
Loss per common share is computed by dividing net loss by the
weighted average number of shares outstanding during each period.
Common stock options and warrants aggregating 338,100, 312,100, and
315,100 common share equivalents as of August 31, 2016, 2015 and
2014, respectively, have been excluded from the calculation of loss
per common share as their effect is anti-dilutive.
Recently Issued Accounting Pronouncements
The Company continually assesses any new
accounting pronouncements to determine their applicability. When it
is determined that a new accounting pronouncement affects the
Company’s financial reporting, the Company undertakes a study
to determine the consequence of the change to its consolidated
financial statements and ensure that there are proper controls in
place to ascertain that the Company’s consolidated financial
statements properly reflect the change.
New pronouncements
assessed by the Company recently are discussed below:
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
F-11
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.
ASU 2016-12 is
effective for annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Early adoption is permitted only for annual reporting
periods beginning after December 15, 2016, including interim
periods within that period.
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.
ASU 2016-10 is
effective for annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Early adoption is permitted only for annual reporting
periods beginning after December 15, 2016, including interim
periods within that period.
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.
ASU 2016- is
effective for annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Early adoption is permitted only for annual reporting
periods beginning after December 15, 2016, including interim
periods within that period.
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 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.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date in the
principal or most advantageous market. The Company uses a fair
value hierarchy that has three levels of inputs, both observable
and unobservable, with use of the lowest possible level of input to
determine fair value.
Level 1 — Valuations for assets and liabilities traded in
active exchange markets, such as the NASDAQ Stock Market. The
Company had one of these assets and no liabilities as of August 31,
2016. The Company had no Level 1 assets or liabilities as of August
31, 2015.
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 ha
d 36 Level 2 as
sets as of August 31,
2016, which consist of certificates of deposit and U.S. treasury
notes.
The Company had no Level
2 assets or liabilities as of August 31, 2015.
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
F-12
assigned to such assets or liabilities. The Company had no Level 3
assets or liabilities as of August 31, 2016 or 2015.
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.
The following table provides information on
the assets and liabilities measured at fair value on a recurring
basis as of
August 31, 2016
:
|
|
|
|
Fair Value
Measurement Using:
|
|
||
|
|
|
Cost /
Other
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
Accumulated
Unrealized Gains and
|
|
|
Fair
Value
|
Value
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
(Losses)
|
|
Money
Market
|
$
4,184,900
|
$
4,184,900
|
$
4,184,900
|
$
-
|
$
-
|
$
-
|
|
Available
for sale
|
$
23,176,500
|
$
23,173,400
|
$
-
|
$
23,176,500
|
$
-
|
$
3,100
|
The Company’s water and water systems consist of the
following approximate costs and accumulated depreciation and
depletion as of August 31:
|
|
August 31, 2016
|
August 31, 2015
|
||
|
|
Costs
|
Accumulated Depreciation and Depletion
|
Costs
|
Accumulated Depreciation and Depletion
|
|
Rangeview water supply
|
$
14,444,600
|
$
(9,400
)
|
$
14,444,600
|
$
(8,800
)
|
|
Sky Ranch water rights and other costs
|
6,607,400
|
(334,500
)
|
6,440,800
|
(194,600
)
|
|
Fairgrounds water and water system
|
2,899,900
|
(886,800
)
|
2,899,900
|
(798,700
)
|
|
Rangeview water system
|
1,624,800
|
(152,800
)
|
1,256,300
|
(110,300
)
|
|
Water supply – other
|
3,703,000
|
(297,800
)
|
3,649,800
|
(193,900
)
|
|
Construction in progress
|
723,500
|
-
|
323,500
|
-
|
|
Totals
|
30,003,200
|
(1,681,300
)
|
29,014,900
|
(1,306,300
)
|
|
Net investments in water and water systems
|
$
28,321,900
|
|
$
27,708,600
|
|
Depletion and Depreciation
The Company recorded $500, $7,000, and $4,400 of depletion charges
during the fiscal years ended August 31, 2016, 2015 and 2014,
respectively. During the fiscal year ended August 31, 2016, this
related entirely to the Rangeview Water Supply (defined below), and
during the fiscal years ended August 31, 2015 and 2014, this
related to the Rangeview Water Supply and the Sky Ranch water
supply (discussed below).
The Company recorded $419,600, $340,300 and $192,200 of
depreciation expense in each of the fiscal years ended August 31,
2016, 2015 and 2014, respectively. These figures include
depreciation for other equipment not included in the table
above.
F-13
Rangeview Water Supply and Water System
The “Rangeview Water Supply” consists of 22,985 acre
feet and is a combination of tributary surface water and
groundwater rights along with certain storage rights associated
with the Lowry Range, a 27,000-acre property owned by the Land
Board located 16 miles southeast of Denver, Colorado. Approximately
$14.4 million of Investments in Water and Water Systems on the
Company’s balance sheet as of August 31, 2016, represents the
costs of assets acquired or facilities constructed to extend water
service to customers located on and off the Lowry Range. The
recorded costs of the Rangeview Water Supply include payments to
the sellers of the Rangeview Water Supply, design and construction
costs and certain direct costs related to improvements to the asset
including legal and engineering fees.
The Company acquired the Rangeview Water Supply beginning in 1996
when:
(i)
The District entered into the 1996 Amended and Restated Lease
Agreement with the Land Board, which owns the Lowry
Range;
(ii)
The Company entered into the Agreement for Sale of Export Water
with the District;
(iii)
The Company entered into the 1996 Service Agreement with the
District for the provision of water service to the Lowry Range;
and
(iv)
In 1997, the Company entered into the Wastewater Service Agreement
with the District for the provision of wastewater service to the
District’s service area.
In July 2014, the Company, the District and the Land Board entered
into the 2014 Amended and Restated Lease (the “Lease”),
which superseded the original 1996 lease, and the Company and the
District entered into an Amended and Restated Service Agreement.
Collectively, the foregoing agreements, as amended, are referred to
as the “Rangeview Water Agreements.”
Pursuant to the Rangeview Water Agreements, the Company owns 11,650
acre feet of water consisting of 10,000 acre feet of groundwater
and 1,650 acre feet of average yield surface water which can be
exported off the Lowry Range to serve area users (referred to as
“Export Water”). The 1,650 acre feet of surface rights
are subject to completion of documentation by the Land Board
related to the Company’s exercise of its right to substitute
an aggregate gross volume of 165,000 acre feet of its groundwater
for 1,650 acre feet per year of adjudicated surface water and to
use this surface water as Export Water. Additionally, assuming
completion of the substitution of groundwater for surface water,
the Company has the exclusive right to provide water and wastewater
service, through 2081, to all water users on the Lowry Range and
the right to develop an additional 12,035 acre feet of groundwater
and 1,650 acre feet of adjudicated surface water to serve customers
either on or off the Lowry Range. The Rangeview Water Agreements
also provide for the Company to use surface reservoir storage
capacity in providing water service to customers both on and off
the Lowry Range.
Services
on the Lowry Range –
Pursuant to the Rangeview Water Agreements,
the Company designs, finances, constructs, operates and maintains
the District’s water and wastewater systems to provide
service to the District’s customers on the Lowry Range. The
Company will operate both the water and the wastewater systems
during the contract period, and the District owns both systems.
After 2081, ownership of the water system will revert to the Land
Board, with the District retaining ownership of the wastewater
system.
Rates and charges for all water and wastewater services on the
Lowry Range, including tap fees and usage or monthly fees, are
governed by the terms of the Rangeview Water Agreements. Rates and
charges are required to be less than the average of similar rates
and charges of three surrounding municipal water and wastewater
service providers, which are reassessed annually. Pursuant to the
Rangeview Water Agreements the Land Board receives a royalty of 10%
or 12% of gross revenues from the sale or disposition of the water
depending on the purchaser of the water, except that the royalty on
tap fees shall be 2% (other than taps sold for Sky Ranch which are
exempt). The Company also is required to pay the Land Board a
minimum annual water production fee, which will offset future
royalty obligations. The Company and the Land Board are working
cooperatively to clarify the calculation of the minimum annual
production fee. Pursuant to the Company’s determination, the
Company has made payments of $45,600 for each of the past two
years. The Company does not anticipate any modification to the
minimum fee to be
F-14
material. The District retains 2% of the remaining gross
revenues and the Company receives 98% of the remaining gross
revenues after the Land Board royalty. The Land Board does not
receive a royalty on wastewater fees. The Company receives 100% of
the District’s wastewater tap fees and 90% of the
District’s wastewater usage fees (the District retains the
other 10%).
Export
Water –
The Company
owns the Export Water and intends to use it to provide water and
wastewater services to customers off the Lowry Range. The Company
will own all wholesale facilities required to extend water and
wastewater services using its Export Water. The Company anticipates
contracting with third parties for the construction of these
facilities. If the Company sells water, the Company is required to
pay royalties to the Land Board ranging from 10% to 12% of gross
revenues.
The Arapahoe County Fairgrounds Water and Water System
The Company owns 321 acre feet of groundwater purchased pursuant to
its agreement with Arapahoe County. The Company plans to use this
water in conjunction with its Rangeview Water Rights in providing
water to areas outside the Lowry Range. The $2.9 million of
capitalized costs includes the costs to construct various Wholesale
and Special Facilities, including a new deep water well, a
500,000-gallon water tank and pipelines to transport water to the
Arapahoe County fairgrounds.
Sky Ranch
In 2010, the Company purchased approximately 931 acres of
undeveloped land known as Sky Ranch. The property includes the
rights to approximately 830 acre feet of water.
Total consideration for the land and water included the $7.0
million purchase price, plus direct costs and fees of $554,100. The
Company allocated the total acquisition cost to the land and water
rights based on estimates of each asset’s respective fair
value.
O&G
Lease
–
On March 10, 2011, the Company
entered into the O&G Lease and the Surface Use Agreement with
Anadarko. Pursuant to the O&G Lease, the Company received an
up-front payment of $1,243,400 from Anadarko for the purpose of
exploring for, developing, producing and marketing oil and gas on
634 acres of mineral estate owned by the Company at its Sky Ranch
property. The Company also received $9,000 in surface use and
damage payments. In December 2012, the O&G Lease was purchased
by a wholly owned subsidiary of ConocoPhillips Company. 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. The O&G Lease is now held by production
entitling the Company to royalties based on
production.
The Company acquired its Rangeview Water
Supply through various amended agreements entered into in the early
1990s. The acquisition was consummated with the signing of the CAA
in 1996. Upon entering into the CAA, the Company recorded an
initial liability of $11.1 million, which represented the cash the
Company received from the participating interest holders that was
used to purchase the Company’s Export Water (described in
greater detail in Note 4 –
Water and Land
Assets
). The Company
agreed to remit a total of $31.8 million of proceeds received from
the sale of Export Water to the participating interest holders in
return for their initial $11.1 million investment. The obligation
for the $11.1 million was recorded as debt, and the remaining $20.7
million contingent liability was not reflected on the
Company’s balance sheet because the obligation to pay this is
contingent on the sale of Export Water, the amounts and timing of
which are not reasonably determinable.
The CAA obligation is non-interest bearing, and if the Export Water
is not sold, the parties to the CAA have no recourse against the
Company. If the Company does not sell the Export Water, the holders
of the Series B Preferred Stock are also not entitled to payment of
any dividend and have no contractual recourse against the
Company.
As the proceeds from the sale of Export
Water are received and the amounts are remitted to the external CAA
holders, the Company allocates a ratable percentage of this payment
to the principal portion (the Participating Interests in Export
Water Supply
liability
account), with the balance of the payment being charged to the
contingent obligation portion. Because the original recorded
liability, which was $11.1 million, was 35% of the original total
liability of $31.8 million, approximately 35% of each payment
remitted to the CAA holders is allocated to the
F-15
recorded liability account. The remaining
portion of each payment, or approximately 65%, is allocated to the
contingent obligation, which is recorded on a net revenue
basis.
From time to time, the Company repurchased various portions of the
CAA obligations, which retained their original priority. The
Company did not make any CAA acquisitions during the fiscal years
ended August 31, 2016 or 2015. In July 2014, the Land Board
relinquished its approximately $2.4 million of CAA interests to the
Company as part of a settlement of the 2011 lawsuit filed by the
Company and the District against the Land Board.
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 August 31,
2016, is approximately $1 million:
|
|
Export Water Proceeds Received
|
Initial Export Water Proceeds to Pure Cycle
|
Total Potential Third-party Obligation
|
Participating Interests Liability
|
Contingency
|
|
Original balances
|
$
–
|
$
218,500
|
$
31,807,700
|
$
11,090,600
|
$
20,717,100
|
|
Activity from inception until August 31, 2014:
|
|
|
|
|
|
|
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 (1)
|
533,000
|
(373,100
)
|
(159,900
)
|
(55,800
)
|
(104,100
)
|
|
Export Water sale payments
|
361,500
|
(262,800
)
|
(98,700
)
|
(34,300
)
|
(64,400
)
|
|
Balance at August 31, 2014
|
1,004,900
|
29,969,200
|
1,052,100
|
354,600
|
697,500
|
|
Fiscal 2015 activity:
|
|
|
|
|
|
|
Export Water sale payments
|
207,900
|
(183,200
)
|
(24,700
)
|
(8,600
)
|
(16,100
)
|
|
Balance at August 31, 2015
|
1,212,800
|
29,786,000
|
1,027,400
|
346,000
|
681,400
|
|
Fiscal 2016 activity:
|
|
|
|
|
|
|
Export Water sale payments
|
49,200
|
(43,300
)
|
(5,900
)
|
(2,000
)
|
(3,900
)
|
|
Balance at August 31, 2016
|
$
1,262,000
|
$
29,742,700
|
$
1,021,500
|
$
344,000
|
$
677,500
|
(1)
The Arapahoe County tap fees are less $34,522 in royalties paid to
the Land Board.
The CAA includes contractually established priorities which call
for payments to CAA holders in order of their priority. This means
the first payees receive their full payment before the next
priority level receives any payment and so on until full repayment.
The Company will receive approximately $6 million of the first
priority payout (the remaining entire first priority payout totals
approximately $6.8 million as of August 31, 2016).
At August 31, 2016, the Company had accrued liabilities of
$242,600, of which $160,000 was for accrued compensation, $5,700
was for estimated property taxes, $48,000 was for professional fees
and the remaining $28,900 was related to operating
payables.
At August 31, 2015, the Company had accrued liabilities of
$499,800, of which $400,000 was for accrued compensation, $4,800
was for estimated property taxes, $52,500 was for professional fees
and the remaining $42,500 was related to operating
payables.
As of August 31, 2016 and 2015, the Company had no
debt.
The Participating Interests in Export Water
Supply are obligations of the Company that have no scheduled
maturity dates. Therefore, these liabilities are not disclosed in
tabular format. However, the Participating Interests in Export
Water Supply are described in Note 5 –
Participating Interests
in Export Water
.
F-16
WISE Partnership
During
December 2014, the Company, through the District,
consented to the waiver of all
contingencies set forth in the Amended and Restated WISE
Partnership – Water Delivery Agreement, dated December 31,
2013 (the “WISE Partnership Agreement”), among the City
and County of Denver acting through its Board of Water
Commissioners (“Denver Water”), the City of Aurora
acting by and through its Utility Enterprise (“Aurora
Water”), and the South Metro WISE Authority
(“SMWA”). The SMWA was formed by the District and nine
other governmental or quasi-governmental water providers pursuant
to the South Metro WISE Authority Formation and Organizational
Intergovernmental Agreement, dated December 31, 2013 (the “SM
IGA”), to enable the members of SMWA to participate in the
regional water supply project known as the Water Infrastructure
Supply Efficiency partnership (“WISE”) created by the
WISE Partnership Agreement. The SM IGA specifies each
member’s pro rata share of WISE and the members’ rights
and obligations with respect to WISE. The WISE Partnership
Agreement provides for the purchase of certain infrastructure
(i.e., pipelines, water storage facilities, water treatment
facilities, and other appurtenant facilities) to deliver water to
and among the 10 members of the SMWA, Denver Water and Aurora
Water. Certain infrastructure has been constructed and other
infrastructure will be constructed over the next several
years.
By consenting to the waiver of the
contingencies set forth in the WISE Partnership Agreement, pursuant
to the terms of the Rangeview/Pure Cycle WISE Project Financing
Agreement (the “WISE Financing Agreement”) between the
Company and the District, the Company has an agreement to fund the
District’s participation in WISE effective as of December 22,
2014. The Company’s cost of funding the District’s
purchase of its share of existing infrastructure and future
infrastructure for WISE and funding operations and water deliveries
related to WISE is projected to be approximately $5.6 million over
the next five years. See further discussion in Note 14
–
Related Party Transactions.
Operating Lease
Effective January 2016, the Company entered into an operating lease
for approximately 2,500 square feet of office and warehouse space.
The lease has a one-year term with payments of $3,000 per
month.
Preferred Stock
The Company’s non-voting Series B Preferred Stock has a
preference in liquidation of $1.00 per share less any dividends
previously paid. Additionally, the Series B Preferred Stock is
redeemable at the discretion of the Company for $1.00 per share
less any dividends previously paid. In the event that the
Company’s proceeds from sale or disposition of Export Water
rights exceed $36,026,232, the Series B Preferred Stock holders
will receive the next $432,513 of proceeds in the form of a
dividend.
Equity Compensation Plan
The Company maintains the 2014 Equity Incentive Plan (the
“2014 Equity Plan”), which was approved by shareholders
in January 2014 and became effective April 12, 2014. Executives,
eligible employees, consultants and non-employee directors are
eligible to receive options and stock grants pursuant to the 2014
Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase
shares of stock and restricted stock awards can be granted with
exercise prices, vesting conditions and other performance criteria
determined by the Compensation Committee of the Board. The Company
has reserved 1.6 million shares of common stock for issuance under
the 2014 Equity Plan. Awards to purchase 62,000 shares of the
Company’s common stock have been made under the 2014 Equity
Plan. Prior to the effective date of the 2014 Equity Plan, the
Company granted stock awards to eligible participants under its
2004 Incentive Plan (the “2004 Incentive Plan”), which
expired April 11, 2014. No additional awards may be granted
pursuant to the 2004 Incentive Plan; however, awards outstanding as
of April 11, 2014, will continue to vest and expire and may be
exercised in accordance with the terms of the 2004 Incentive
Plan.
The Company estimates the fair value of share-based payment awards
on the date of grant using the Black-Scholes option-pricing model
(“Black-Scholes model”). Using the Black-Scholes model,
the value of the portion of the award that is ultimately expected
to vest is recognized as a period expense over the requisite
service period in the statement of operations. Option forfeitures
are to be estimated at the time of grant and revised, if necessary,
in
F-17
subsequent periods if actual forfeitures differ from those
estimates. The Company does not expect any forfeiture of its option
grants and therefore the compensation expense has not been reduced
for estimated forfeitures. During fiscal year 2015, 12,500 options
expired and 16,500 were exercised. During fiscal year 2016, 10,000
options expired. The Company attributes the value of share-based
compensation to expense using the straight-line single option
method for all options granted.
The Company’s determination of the estimated fair value of
share-based payment awards on the date of grant is affected by the
following variables and assumptions:
●
The grant date exercise price – is the closing market
price of the Company’s common stock on the date of
grant;
●
Estimated option lives – based on historical experience
with existing option holders;
●
Estimated dividend rates – based on historical and
anticipated dividends over the life of the option;
●
Life of the option – based on historical experience option
grants have lives between 8 and 10 years;
●
Risk-free interest rates – with maturities that
approximate the expected life of the options granted;
●
Calculated stock price volatility – calculated over the
expected life of the options granted, which is calculated based on
the weekly closing price of the Company’s common stock over a
period equal to the expected life of the option; and
●
Option exercise behaviors – based on actual and
projected employee stock option exercises and
forfeitures.
In January 2016, the Company granted its non-employee directors
options to purchase a combined 36,000 shares of the Company’s
common stock pursuant to the 2014 Equity Plan. Options for 26,000
shares vest one year after the date of grant, and options for
10,000 shares vest one-half one year after the date of grant and
one-half two years after the date of grant. All of the options
expire 10 years after the date of grant. The Company calculated the
fair value of the options granted during January 2016 at
approximately $104,100, using the Black Scholes model with the
following variables: weighted average exercise price of $4.26
(which was the closing sales price of the Company’s common
stock on the date of grant); estimated option lives of 10 years;
weighted average risk free interest rate of 2.06%; weighted average
stock price volatility of 58.26%; and an estimated forfeiture rate
of 0%. The $104,100 of stock-based compensation is being expensed
monthly over the vesting periods.
In January 2015, the Company granted its non-employee directors
options to purchase a combined 26,000 shares of the Company’s
common stock pursuant to the 2014 Equity Plan. The options vest one
year after the date of grant and expire 10 years after the date of
grant. The Company calculated the fair value of the options granted
during January 2015 at approximately $72,000, using the Black
Scholes model with the following variables: weighted average
exercise price of $4.17 (which was the closing sales price of the
Company’s common stock on the date of grant); estimated
option lives of 10 years; weighted average risk free interest rate
of 1.77%; weighted average stock price volatility of 57.45%; and an
estimated forfeiture rate of 0%. The $72,000 of stock-based
compensation is being expensed monthly over the vesting
periods.
In January 2014, the Company granted its non-employee directors
options to purchase a combined 32,500 shares of the Company’s
common stock pursuant to the 2004 Incentive Plan. The options vest
one year after the date of grant and expire 10 years after the date
of grant. The Company calculated the fair value of these options at
$132,900 using the Black-Scholes model with the following
variables: weighted average exercise price of $6.08 (which was the
closing sales price of the Company’s common stock on the date
of grant); estimated option lives of 10 years; estimated
dividend rate of 0%; weighted average risk-free interest rate of
1.84%; weighted average stock price volatility of 63.6%; and an
estimated forfeiture rate of 0%. The $132,900 of stock-based
compensation was being expensed monthly over the vesting
periods.
During the fiscal year ended August 31, 2015, 16,500 options were
exercised. No options were exercised during the fiscal years ended
August 31, 2016 or 2014.
The following table summarizes the stock option activity for the
combined 2004 Incentive Plan and 2014 Equity Plan for the fiscal
year ended August 31, 2016:
F-18
|
|
Number of Options
|
Weighted-Average Exercise Price
|
Weighted-Average Remaining Contractual Term
|
Approximate Aggregate Intrinsic Value
|
|
Outstanding at beginning of period
|
312,000
|
$
5.10
|
|
|
|
Granted
|
36,000
|
$
4.26
|
|
|
|
Exercised
|
-
|
$
-
|
|
|
|
Forfeited or expired
|
(10,000
)
|
$
13.25
|
|
|
|
Outstanding at August 31, 2016
|
338,000
|
$
4.77
|
5.68
|
$
248,000
|
|
|
|
|
|
|
|
Options exercisable at August 31, 2016
|
302,000
|
$
4.83
|
5.36
|
$
227,100
|
The following table summarizes the activity and value of non-vested
options as of and for the fiscal year ended August 31,
2016:
|
|
Number of Options
|
Weighted-Average Grant Date Fair Value
|
|
Non-vested options outstanding at beginning of period
|
59,333
|
$
3.66
|
|
Granted
|
36,000
|
2.89
|
|
Vested
|
(59,333
)
|
3.66
|
|
Forfeited
|
-
|
-
|
|
Non-vested options outstanding at August 31, 2016
|
36,000
|
$
2.89
|
All non-vested options are expected to vest. The total fair value
of options vested during the fiscal years ended August 31, 2016,
2015 and 2014 was $216,900, $280,700 and $219,200, respectively.
The weighted average grant date fair value of options granted
during the fiscal years ended August 31, 2016, 2015 and 2014 was
$2.89, $2.78, and $4.09, respectively.
Share-based compensation expense for the
fiscal years ended August 31, 2016, 2015 and 2014, was
$219,900,
$240,000,
and $251,900, respectively.
At August 31, 2016, the Company had
unrecognized expenses relating to non-vested options that are
expected to vest totaling $51,400.
The weighted-average period over which these
options are expected to vest is less than three years. The Company
has not recorded any excess tax benefits to additional paid in
capital.
Warrants
As of August 31, 2016, the Company had outstanding warrants to
purchase 92 shares of common stock at an exercise price of $1.80
per share. These warrants expire six months from the earlier
of:
(i)
The date all of the Export Water is sold or otherwise disposed
of,
(ii)
The date the CAA is terminated with respect to the original holder
of the warrant, or
(iii)
The date on which the Company makes the final payment pursuant to
Section 2.1(r) of the CAA.
No warrants were exercised during fiscal 2016, 2015 or
2014.
The Company sells wholesale water and wastewater services to the
District pursuant to the Rangeview Water Agreements. Sales to the
District accounted for 67%, 19% and 9% of the Company’s total
water and wastewater revenues for the fiscal years ended August 31,
2016, 2015 and 2014, respectively. The District had one
significant
F-19
customer, the Ridgeview Youth Services Center. Pursuant to the
Rangeview Water Agreements, the Company is providing water and
wastewater services to this customer on behalf of the District. The
District’s significant customer accounted for 55%, 16%, and
7% of the Company’s total water and wastewater revenues for
the fiscal years ended August 31, 2016, 2015 and 2014,
respectively.
Revenues from another customer directly and
indirectly represented approximately
less than 1%,
75% and 88% of the
Company’s water and wastewater revenues for the fiscal years
ended August 31, 2016, 2015 and 2014,
respectively.
The Company had accounts receivable from the District which
accounted for 74% and 87% of the Company’s water and
wastewater trade receivables balances at August 31, 2016 and 2015,
respectively. Accounts receivable from the District’s largest
customer accounted for 63% and 77% of the Company’s water and
wastewater trade receivables as of August 31, 2016 and 2015,
respectively.
Deferred income taxes reflect the tax effects of net operating loss
carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant
components of the Company’s deferred tax assets as of August
31 are as follows:
|
|
For the Fiscal Years Ended August 31,
|
|
|
|
2016
|
2015
|
|
Deferred tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
2,393,200
|
$
1,816,200
|
|
Deferred revenue
|
344,300
|
503,300
|
|
Depreciation and depletion
|
247,400
|
320,300
|
|
Other
|
65,600
|
34,200
|
|
Valuation allowance
|
(3,050,500
)
|
(2,674,000
)
|
|
Net deferred tax asset
|
$
-
|
$
-
|
The Company has recorded a valuation allowance against the deferred
tax assets as the Company is unable to reasonably determine if it
is more likely than not that deferred tax assets will ultimately be
realized.
Income taxes computed using the federal statutory income tax rate
differs from our effective tax rate primarily due to the following
for the fiscal years ended August 31:
|
|
For the
Fiscal Years Ended August 31,
|
||
|
|
2016
|
2015
|
2014
|
|
Expected
benefit from federal taxes at statutory rate of 34%
|
$
(420,300
)
|
$
(195,500
)
|
$
97,100
|
|
State
taxes, net of federal benefit
|
(40,700
)
|
(19,000
)
|
9,400
|
|
Expiration
of net operating losses
|
-
|
-
|
89,400
|
|
Permanent
and other differences
|
84,500
|
91,900
|
96,500
|
|
Change
in valuation allowance
|
376,500
|
122,600
|
(292,400
)
|
|
Total
income tax expense / (benefit)
|
$
-
|
$
-
|
$
-
|
At August 31, 2016, the Company has
$6.5
million of net operating loss carryforwards
available for income tax purposes, which expire between fiscal 2032
and 2036. Utilization of these net operating loss carryforwards may
be subject to substantial annual ownership change limitations
provided by the Internal Revenue Code. Such an annual limitation
could result in the expiration of the net operating loss
carryforwards before utilization.
No net operating loss carryforwards expired during the fiscal years
ended August 31, 2016 or 2015. Net operating loss carryforwards of
$239,600 expired during the fiscal year ended August
2014.
F-20
The Company maintains a Pure Cycle Corporation 401(k) Profit
Sharing Plan (the “Plan”), a defined contribution
retirement plan for the benefit of its employees. The Plan is
currently a salary deferral only plan, and at this time the Company
does not match employee contributions. The Company pays the annual
administrative fees of the Plan, and the Plan participants pay the
investment fees. The Plan is open to all employees, age 21 or
older, who have been employees of the Company for at least six
months. During the fiscal years ended August 31, 2016, 2015 and
2014, the Company paid fees of $5,000, $3,800 and $3,600,
respectively, for the administration of the Plan.
The Company has historically been involved in various claims,
litigation and other legal proceedings that arise in the ordinary
course of its business. The Company records an accrual for a loss
contingency when its occurrence is probable and damages can be
reasonably estimated based on the anticipated most likely outcome
or the minimum amount within a range of possible outcomes. The
Company makes such estimates based on information known about the
claims and experience in contesting, litigating and settling
similar claims. Disclosures are also provided for reasonably
possible losses that could have a material effect on the
Company’s financial position, results of operations or cash
flows.
Prior to the sale of the Company’s agricultural assets and
the residual operations through December 31, 2015, the Company
operated primarily in two lines of business: (i) the wholesale
water and wastewater business and (ii) the agricultural
farming business. The Company has discontinued its agricultural
farming operations. Currently the Company operates its wholesale
water and wastewater services segment as its only line of business.
The wholesale water and wastewater services business includes
selling water service to customers, which is then provided by the
Company using water rights owned or controlled by the Company and
developing infrastructure to divert, treat and distribute that
water and collect, treat and reuse wastewater.
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”). The
Company provided funding of $113,600, $78,600, and $114,900 for the
fiscal years ended August 31, 2016, 2015, and 2014,
respectively.
Through the WISE Financing Agreement, to date the Company made
payments of $2,870,500 to purchase certain rights to use existing
water transmission and related infrastructure acquired by the WISE
project and to construct the connection to the WISE system. The
amounts are included as Investments in Water and Water Systems on
the Company’s balance sheet as of August 31, 2016. The
Company anticipates spending the following over the next five
fiscal years to fund the District’s purchase of its share of
the water transmission line and additional facilities, water and
related assets for WISE and to fund operations and water deliveries
related to WISE:
|
Estimated WISE Costs
|
|||||
|
|
For the Fiscal Years Ended August 31,
|
||||
|
|
2017
|
2018
|
2019
|
2020
|
2021
|
|
Operations
|
$
96,600
|
$
96,600
|
$
96,600
|
$
96,600
|
$
96,600
|
|
Water Delivery
|
45,000
|
225,000
|
495,000
|
675,000
|
855,000
|
|
Capital
|
464,000
|
339,000
|
464,000
|
1,339,200
|
57,100
|
|
Other
|
43,500
|
23,600
|
86,600
|
23,600
|
23,600
|
|
|
$
649,100
|
$
684,200
|
$
1,142,200
|
$
2,134,400
|
$
1,032,300
|
The Company has outstanding loans of $800,400 to the District and
Sky Ranch Metropolitan District No. 5, which are both related
parties, as discussed below:
F-21
The District
In 1995, the Company extended a loan to the
District. The loan provided for borrowings of up to $250,000, is
unsecured, and bears interest based on the prevailing prime rate
plus 2% (5.5% at August 31, 2016).
The maturity
date of the loan is December 31, 2020. Beginning in January 2014,
the District and the Company entered into a funding agreement that
allows the Company to continue to provide funding to the District
for day-to-day operations and accrue the funding into a note that
bears interest at a rate of 8% per annum and remains in full force
and effect for so long as the 2014 Amended and Restated Lease
Agreement remains in effect.
The $628,500 balance of the notes receivable
at August 31, 2016, includes borrowings of $260,200 and accrued
interest of $368,300. The $591,200 balance of the notes receivable
at August 31, 2015, includes borrowings of $237,000 and accrued
interest of $354,200.
Sky Ranch Metropolitan District No. 5
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 partieis 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.
Pursuant to the Operation Funding Agreements and the Facilities
Funding and Acquisition Agreement, the Company has provided funding
to the district in the amounts of $8,500, $97,500 and $50,900 for
the fiscal years 2016, 2015, and 2014, respectively. The $171,900
balance of the receivable at August 31, 2016, includes advances of
$156,900 and accrued interest of $15,000. Upon the district's
ratification of the advances and related expenditures, the amount
was reclassified to long-term and is recorded as part of Notes
receivable – related parties.
|
Quarterly results of operations
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
2015
|
||||||
|
|
Three months ended
|
Three months ended
|
||||||
|
|
30 Nov
|
29 Feb
|
31 May
|
31 Aug
|
30 Nov
|
28 Feb
|
31 May
|
31 Aug
|
|
|
(In thousands, except per share data)
|
|||||||
|
Total revenues
|
$
126
|
$
76
|
$
101
|
$
149
|
$
570
|
$
372
|
$
120
|
$
135
|
|
Gross margin
|
(7
)
|
(44
)
|
(34
)
|
8
|
373
|
217
|
(19
)
|
(134
)
|
|
Operating loss
|
(472
)
|
(557
)
|
(533
)
|
(618
)
|
47
|
(324
)
|
(448
)
|
(952
)
|
|
Net income (loss)
|
$
(97
)
|
$
(271
)
|
$
(422
)
|
$
(521
)
|
$
10
|
$
(86
)
|
$
30
|
$
(23,082
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
income (loss) per share
|
*
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.03
)
|
*
|
*
|
*
|
$
(0.96
)
|
|
* Amount is less than $.01 per share
|
|
|
|
|
|
|
|
|
The following item had a significant impact on the Company’s
net income (loss):
●
In August 2015, the Company sold its remaining farm portfolio. The
Company recognized a loss of $22.1 million.
F-22
There were no changes in or disagreements with accountants on
accounting and financial disclosures.
(a)
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) of the Exchange Act) that are designed to
ensure that information required to be disclosed in our reports
filed or submitted to the SEC under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified by the SEC’s rules and forms, and that information
is accumulated and communicated to management, including the
principal executive and financial officer as appropriate, to allow
timely decisions regarding required disclosures. The President and
Chief Financial Officer evaluated the effectiveness of disclosure
controls and procedures as of August 31, 2016, pursuant to Rule
13a-15(b) under the Exchange Act. Based on that evaluation, the
President and Chief Financial Officer concluded that, as of the end
of the period covered by this report, the Company’s
disclosure controls and procedures were effective. A system of
controls, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the system of controls
are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within a company have been detected.
(b)
Management’s Report on Internal Control Over Financial
Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act. The Exchange Act defines internal
control over financial reporting as a process designed by, or under
the supervision of, our executive and principal financial officers
and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP and
includes those policies and procedures that:
●
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
our assets;
●
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management
and our directors; and
●
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of our internal control over
financial reporting as of August 31, 2016. In making this
assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control – Integrated
Framework (“2013 COSO Framework”). Based on our
assessment, we determined that, as of August 31, 2016, our internal
control over financial reporting was effective based on those
criteria.
(c)
R
eport
of the Independent Registered Public Accounting
Firm
The effectiveness of our internal control over financial reporting
as of August 31, 2016, has been audited by GHP Horwath, P.C., an
independent registered public accounting firm, as stated in its
attestation report which is included in “Item 8.
Consolidated Financial Statements and Supplementary Data” of
this Annual Report on Form 10-K.
39
(d)
Changes in Internal Controls
No changes were made to our internal control over financial
reporting during our most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
None.
Our board of directors has adopted a Code of
Business Conduct and Ethics applicable to all of our directors,
officers and employees, which is available on our website at
www.purecyclewater.com
.
We intend to disclose any amendments to or waivers from the
provisions of our Code of Business Conduct and Ethics that are
applicable to our principal executive officer, principal financial
officer or principal accounting officer and that relate to any
element of the SEC’s definition of code of ethics by posting
such information on our website, in a press release, or on a
Current Report on Form 8-K.
Information required by this item will be
contained in, and is incorporated herein by reference to, our
definitive Proxy Statement pursuant to Regulation 14A promulgated
under the Exchange Act for the Annual Meeting of Shareholders to be
held in January 2017, which is expected to be filed on or about
December
5,
2016 (the
“Proxy Statement”).
The information required by this item will be included in, and is
incorporated herein by reference to, our Proxy
Statement.
The information required by this item will be included in, and is
incorporated herein by reference to, our Proxy
Statement.
The information required by this item will be included in, and is
incorporated herein by reference to, our Proxy
Statement.
The information required by this item will be included in, and is
incorporated herein by reference to, our Proxy
Statement.
40
|
(a)
|
Documents filed as part of this Form 10-K
|
|
(1)
|
Financial Statements
See “Index to Consolidated Financial Statements and
Supplementary Data” in Part II, Item 8 of this Form
10-K.
|
|
(2)
|
Financial Statement Schedules
All schedules are omitted either because they are not required or
the required information is shown in the consolidated financial
statements or notes thereto.
|
|
(3)
|
Exhibits
The exhibits listed on the accompanying “Exhibit Index”
are filed or incorporated by reference as part of this Form 10-K,
unless otherwise indicated.
|
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PURE CYCLE CORPORATION
By:
/s/ Mark W.
Harding
Mark W. Harding, President and Chief Financial Officer
October 27, 2016
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Mark W. Harding
|
|
President,
Chief Financial Officer and Director
|
|
October 27, 2016
|
|
Mark W. Harding
|
|
(Principal Executive Officer, Principal Financial and Accounting
Officer)
|
|
|
|
/s/ Harrison H. Augur
|
|
|
|
|
|
Harrison H. Augur
|
|
Chairman, Director
|
|
October 27, 2016
|
|
/s/ Patrick J. Beirne
|
|
|
|
|
|
Patrick J. Beirne
|
|
Director
|
|
October 27, 2016
|
|
/s/ Arthur G. Epker III
|
|
|
|
|
|
Arthur G. Epker III
|
|
Director
|
|
October 27, 2016
|
|
/s/ Richard L. Guido
|
|
|
|
|
|
Richard L. Guido
|
|
Director
|
|
October 27, 2016
|
|
/s/ Peter C. Howell
|
|
|
|
|
|
Peter C. Howell
|
|
Director
|
|
October 27, 2016
|
42
EXHIBIT INDEX
|
Exhibit Number
|
|
Description
|
|
3.1
|
|
Articles of Incorporation of the Company. Incorporated by reference
to Appendix B to the Proxy Statement on Schedule 14A filed on
December 14, 2007.
|
|
3.2
|
|
Bylaws of the Company. Incorporated by reference to Appendix C to
the Proxy Statement on Schedule 14A filed on December 14,
2007.
|
|
4.1
|
|
Specimen Stock Certificate. Incorporated by reference to Exhibit
4.1 to Quarterly Report on Form 10-Q for the fiscal quarter
ended February 28, 2015.
|
|
10.1
|
|
2
004 Incentive
Plan, effective April 12, 2004. Incorporated by reference to
Exhibit F to the Proxy Statement for the Annual Meeting held on
April 12, 2004. **
|
|
|
|
|
|
10.2
|
|
Wastewater Service Agreement, dated January 22, 1997, by and
between the Company and the Rangeview Metropolitan District.
Incorporated by reference to Exhibit 10.3 to the Annual Report on
Form 10-KSB for the fiscal year ended August 31, 1998.
|
|
10.3
|
|
Comprehensive Amendment Agreement No. 1, dated April 11, 1996, by
and among Inco Securities Corporation, the Company, the
Bondholders, Gregory M. Morey, Newell Augur, Jr., Bill Peterson,
Stuart Sundlun, Alan C. Stormo, Beverlee A. Beardslee, Bradley Kent
Beardslee, Robert Douglas Beardslee, Asra Corporation,
International Properties, Inc., and the Land Board. Incorporated by
reference to Exhibit 10.7 to the Quarterly Report on Form 10-QSB
for the period ended May 31, 1996.
|
|
10.4
|
|
Agreement for Sale of Export Water dated April 11, 1996 by and
between the Company and the District. Incorporated by reference to
Exhibit 10.3 to the Quarterly Report on Form 10-QSB for the fiscal
quarter ended May 31, 1996.
|
|
10.5
|
|
Bargain and Sale Deed among the Land Board, the District and the
Company dated April 11, 1996. Incorporated by reference to Exhibit
10.18 to Amendment No. 1 to Registration Statement on Form SB-2,
filed on June 7, 2004, Registration No. 333-114568.
|
|
10.6
|
|
Agreement for Water Service dated August 3, 2005 among the Company,
Rangeview Metropolitan District and Arapahoe County incorporated by
reference to Exhibit 10.24 to the Current Report on Form 8-K filed
on August 4, 2005.
|
|
10.7
|
|
Amendment No. 1 to Agreement for Water Service dated August 25,
2008, between the Company and Arapahoe County. Incorporated by
reference to Exhibit 10.36 to the Annual Report on Form 10-K for
the fiscal year ended August 31, 2008.
|
|
10.8
|
|
Paid-Up Oil and Gas Lease dated March 14, 2011, between the Company
and Anadarko E&P Company, L.P. Incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K filed on March 15,
2011.
|
|
10.9
|
|
Surface Use and Damage Agreement dated March 14, 2011, between the
Company and Anadarko E&P Company, L.P. Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed
on March 15, 2011.
|
|
10.10
|
|
2014 Equity Incentive Plan, effective April 12, 2014.
Incorporated by reference to Exhibit A to the Proxy Statement for
the Annual Meeting held on January 15, 2014. **
|
|
10.11
|
|
2014 Amended and Restated Lease Agreement, dated July 10, 2014, by
and between the Land Board, the District, and the Company.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K filed on July 14, 2014.
|
|
10.12
|
|
2014 Amended and Restated Service Agreement, dated July 10, 2014,
by and between the Company and the District. Incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed
on July 14, 2014.
|
|
10.13
|
|
Business Loan
Agreement dated October 27, 2014, between the Company and The First
National Bank of Las Animas. Incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed on October 29,
2014.
|
|
10.14
|
|
Commercial Pledge
Agreement, dated October 27, 2014, between the Company and The
First National Bank of Las Animas. Incorporated by reference to
Exhibit 10.2 to the Current Report on Form 8-K filed on October 29,
2014.
|
|
10.15
|
|
Rangeview/Pure
Cycle WISE Project Financing Agreement, effective as of December
22, 2014. Incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed on December 30, 2014.
|
|
10.16
|
|
South
Metro WISE Authority Formation and Organizational Intergovernmental
Agreement, dated December 31, 2013. Incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2014.
|
|
10.17
|
|
Amended and
Restated WISE Partnership – Water Delivery Agreement, dated
December 31, 2013, among the City and County of Denver acting
through its Board of Water Commissioners, the City of Aurora acting
by and through its Utility Enterprise, and South Metro WISE
Authority. Incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the fiscal quarter ended November 30,
2014.
|
|
10.18
|
|
Agreement for
Purchase and Sale of Western Pipeline Capacity, dated November 19,
2014, among the Rangeview Metropolitan District and certain members
of the South Metro WISE Authority. Incorporated by reference to
Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2014.
|
|
10.19
|
|
Settlement
Agreement and Mutual Release, dated January 29, 2015, by and
between HP A&M, the Company and PCY Holdings. Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed
on February 3, 2015.
|
|
10.20
|
|
Purchase and Sale
Agreement among the Company, PCY Holdings and Arkansas River Farms,
LLC, dated March 11, 2015. Incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K filed on March 17,
2015.
|
|
10.21
|
|
First
Amendment to Purchase and Sale Agreement among the Company, PCY
Holdings and Arkansas River Farms, dated March 31, 2015.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed on May 21, 2015.
|
|
10.22
|
|
Second
Amendment to Purchase and Sale Agreement among the Company, PCY
Holdings and Arkansas River Farms, dated May 18, 2015. Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed on May 21, 2015.
|
|
10.23
|
|
Third
Amendment to Purchase and Sale Agreement among the Company, PCY
Holdings and Arkansas River Farms, dated June 18, 2015.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed on June 19, 2015
|
|
10.24
|
|
Fourth
Amendment to Purchase and Sale Agreement among the Company, PCY
Holdings and Arkansas River Farms, dated July 2, 2015. Incorporated
by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for
the fiscal quarter ended May 31, 2015.
|
|
21.1
|
|
Subsidiaries
|
|
23.1
|
|
Consent
of GHP Horwath, P.C. *
|
|
31.1
|
|
Certification under Section 302 of the Sarbanes-Oxley Act of 2002.
*
|
|
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
***
XBRL Instance Document. *
XBRL Taxonomy Extension Schema Document. *
XBRL Taxonomy Extension Calculation Linkbase Document.
*
XBRL Taxonomy Extension Definition Linkbase Document.
*
XBRL Taxonomy Extension Label Linkbase Document. *
XBRL Taxonomy Extension Presentation Linkbase Document.
*
|
_______________________________
*
Filed herewith
**
Indicates management contract or compensatory plan or arrangement
in which directors or executive officers are eligible to
participate.
***
Furnished herewith
TABLE OF CONTENTS
Part IItem 1 BusinessItem 1A Risk FactorsItem 1B Unresolved Staff CommentsItem 2 PropertiesItem 1 Our Water and Land AssetsItem 1 Our Water and Land Assets Sky RanchItem 3 Legal ProceedingsItem 4 Mine Safety DisclosuresPart IIItem 5 Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6 Selected Financial DataItem 7 Management S Discussion and Analysis Of Financial Condition and Results Of OperationsPart Ii, Item 8Item 7A Quantitative and Qualitative Disclosures About Market RiskItem 8 Consolidated Financial Statements and Supplementary DataNote 1 OrganizationNote 2 Summary Of Significant Accounting PoliciesNote 3 Fair Value MeasurementsNote 4 Water and Land AssetsNote 5 Participating Interests in Export WaterNote 6 Accrued LiabilitiesNote 7 Long-term Debt and Operating LeaseNote 8 Shareholders EquityNote 9 Significant CustomersNote 10 Income TaxesNote 11 401(k) PlanNote 12 Litigation Loss ContingenciesNote 13 Segment ReportingNote 14 Related Party TransactionsNote 15 Unaudited Quarterly Financial DataItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9B Other InformationPart IIIItem 10 Directors, Executive Officers and Corporate GovernanceItem 11 Executive CompensationItem 12 Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13 Certain Relationships and Related Transactions and Director IndependenceItem 14 Principal Accounting Fees and ServicesPart IVItem 15 Exhibits and Financial Statement Schedules