x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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PURE CYCLE CORPORATION
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(Exact name of registrant as specified in its charter)
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Colorado
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84-0705083
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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1490 Lafayette Street, Suite 203, Denver, CO
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80218
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(Address of principal executive offices)
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(Zip Code)
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(303) 292 – 3456
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(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)
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Smaller Reporting Company x
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Common stock, 1/3 of $.01 par value
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24,037,596
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(Class)
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(Number of Shares)
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Page
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PART I - FINANCIAL INFORMATION
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Item 1 – Consolidated Financial Statements (unaudited)
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3
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3
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4
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5
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6
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7
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20
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31
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32
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33
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33 | ||
33
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34
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ASSETS:
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May 31, 2013
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August 31, 2012
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||||||
Current assets:
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(unaudited)
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|||||||
Cash and cash equivalents
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$ | 3,069,427 | $ | 1,623,517 | ||||
Marketable securities
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— | 1,101,367 | ||||||
Trade accounts receivable, net
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271,491 | 135,458 | ||||||
Current portion of receivable from HP A&M
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6,597,952 | 4,456,857 | ||||||
Prepaid expenses
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262,988 | 279,782 | ||||||
Current portion of construction proceeds receivable
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— | 64,783 | ||||||
Total current assets
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10,201,858 | 7,661,764 | ||||||
Investments in water and water systems, net
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88,586,111 | 88,510,359 | ||||||
Land - Sky Ranch
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3,770,638 | 3,778,464 | ||||||
Land and water held for sale
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5,748,630 | 5,748,630 | ||||||
Construction proceeds receivable, less current portion
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— | 226,879 | ||||||
Note receivable - related party:
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||||||||
Rangeview Metropolitan District, including accrued interest
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552,949 | 543,945 | ||||||
Receivable from HP A&M, less current portion
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— | 5,093,365 | ||||||
Other assets
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108,136 | 18,671 | ||||||
Total assets
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$ | 108,968,322 | $ | 111,582,077 | ||||
LIABILITIES:
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||||||||
Current liabilities:
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||||||||
Accounts payable
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$ | 121,792 | $ | 261,383 | ||||
Current portion of promissory notes payable
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4,836,358 | 5,340,890 | ||||||
Accrued liabilities
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196,217 | 172,630 | ||||||
Deferred revenues
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147,949 | 65,384 | ||||||
Deferred oil and gas lease payment
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328,130 | 414,480 | ||||||
Total current liabilities
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5,630,446 | 6,254,767 | ||||||
Deferred revenues, less current portion
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1,248,567 | 1,297,605 | ||||||
Deferred oil and gas lease payment, less current portion
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— | 224,510 | ||||||
Promissory notes payable, less current portion
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3,094,904 | 4,209,329 | ||||||
Participating Interests in Export Water Supply
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1,192,393 | 1,208,928 | ||||||
Tap Participation Fee payable to HP A&M, net of $42 million and $45 million discount, respectively
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70,685,795 | 68,269,176 | ||||||
Total liabilities
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81,852,105 | 81,464,315 | ||||||
Commitments and contingencies
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— | — | ||||||
SHAREHOLDERS’ EQUITY:
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||||||||
Preferred stock:
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||||||||
Series B - par value $.001 per share; 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)
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433 | 433 | ||||||
Common stock:
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Par value 1/3 of $.01 per share; 40 million shares authorized; 24,037,596 shares outstanding both periods presented
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80,130 | 80,130 | ||||||
Additional paid-in capital
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103,463,122 | 103,420,870 | ||||||
Accumulated comprehensive loss
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— | (1,081 | ) | |||||
Accumulated deficit
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(76,427,468 | ) | (73,382,590 | ) | ||||
Total shareholders' equity
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27,116,217 | 30,117,762 | ||||||
Total liabilities and shareholders’ equity
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$ | 108,968,322 | $ | 111,582,077 |
Three Months Ended:
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May 31, 2013
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May 31, 2012
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Revenues:
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Metered water usage
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$ | 89,666 | $ | 32,301 | ||||
Wastewater treatment fees
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10,069 | 11,315 | ||||||
Farm operations
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296,085 | — | ||||||
Special facility funding recognized
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10,377 | 10,377 | ||||||
Water tap fees recognized
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3,574 | 3,574 | ||||||
Other
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3,673 | — | ||||||
Total revenues
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413,444 | 57,567 | ||||||
Expenses:
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||||||||
Water service operations
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(59,552 | ) | (16,779 | ) | ||||
Wastewater service operations
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(4,898 | ) | (5,429 | ) | ||||
Farm operations
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(27,867 | ) | — | |||||
Depletion and depreciation
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(22,198 | ) | (22,114 | ) | ||||
Total cost of revenues
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(114,515 | ) | (44,322 | ) | ||||
Gross margin
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298,929 | 13,245 | ||||||
General and administrative expenses
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(460,479 | ) | (621,243 | ) | ||||
Depreciation
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(55,481 | ) | (55,574 | ) | ||||
Operating loss
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(217,031 | ) | (663,572 | ) | ||||
Other income (expense):
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Oil and gas lease income, net
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103,620 | 104,580 | ||||||
Interest income
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4,762 | 12,837 | ||||||
Other
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1,395 | (791 | ) | |||||
Interest expense
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(73,627 | ) | — | |||||
Interest imputed on the Tap Participation Fee payable to HP A&M
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(871,864 | ) | (872,980 | ) | ||||
Net loss
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(1,052,745 | ) | (1,419,926 | ) | ||||
Unrealized gain (loss) on marketable securities
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56 | (720 | ) | |||||
Comprehensive Loss
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$ | (1,052,689 | ) | $ | (1,420,646 | ) | ||
Net loss per common share – basic and diluted
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$ | (0.04 | ) | $ | (0.06 | ) | ||
Weighted average common shares outstanding – basic and diluted
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24,037,596 | 24,037,596 |
Nine Months Ended:
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May 31, 2013
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May 31, 2012
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Revenues:
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Metered water usage
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$ | 240,593 | $ | 98,301 | ||||
Wastewater treatment fees
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31,384 | 34,944 | ||||||
Farm operations
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963,935 | — | ||||||
Special facility funding recognized
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31,131 | 31,131 | ||||||
Water tap fees recognized
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10,721 | 10,722 | ||||||
Other
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8,603 | — | ||||||
Total revenues
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1,286,367 | 175,098 | ||||||
Expenses:
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Water service operations
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(137,820 | ) | (48,496 | ) | ||||
Wastewater service operations
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(12,842 | ) | (15,944 | ) | ||||
Farm operations
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(73,967 | ) | — | |||||
Depletion and depreciation
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(66,514 | ) | (66,304 | ) | ||||
Other
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(20,673 | ) | — | |||||
Total cost of revenues
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(311,816 | ) | (130,744 | ) | ||||
Gross margin
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974,551 | 44,354 | ||||||
General and administrative expenses
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(1,602,130 | ) | (1,804,474 | ) | ||||
Depreciation
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(165,308 | ) | (164,066 | ) | ||||
Operating loss
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(792,887 | ) | (1,924,186 | ) | ||||
Other income (expense):
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Oil and gas lease income, net
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310,860 | 319,379 | ||||||
Interest income
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24,429 | 42,415 | ||||||
Other
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6,176 | 3,912 | ||||||
Interest expense
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(176,837 | ) | — | |||||
Interest imputed on the Tap Participation Fee payable to HP A&M
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(2,416,619 | ) | (2,586,780 | ) | ||||
Net loss
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(3,044,878 | ) | (4,145,260 | ) | ||||
Unrealized gain on marketable securities
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1,081 | 2,715 | ||||||
Comprehensive Loss
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$ | (3,043,797 | ) | $ | (4,142,545 | ) | ||
Net loss per common share – basic and diluted
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$ | (0.13 | ) | $ | (0.17 | ) | ||
Weighted average common shares outstanding – basic and diluted
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24,037,596 | 24,037,596 |
Nine Months Ended
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May 31, 2013
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May 31, 2012
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Cash flows from operating activities:
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Net loss
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$ | (3,044,878 | ) | $ | (4,145,260 | ) | ||
Adjustments to reconcile net loss to net cash used for operating activities:
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Imputed interest on Tap Participation Fee payable to HP A&M
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2,416,619 | 2,586,780 | ||||||
Depreciation, depletion and other non-cash items
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231,822 | 230,370 | ||||||
Interest accrued on agriculture land promissory notes
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67,383 | — | ||||||
Stock-based compensation expense
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42,252 | 42,257 | ||||||
Interest income and other non-cash items
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1,763 | 3,085 | ||||||
Interest added to receivable from Rangeview Metropolitan District
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(9,004 | ) | (9,037 | ) | ||||
Interest added to construction proceeds receivable
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— | (14,786 | ) | |||||
Changes in operating assets and liabilities:
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||||||||
Trade accounts receivable
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(136,033 | ) | 44,381 | |||||
Prepaid expenses
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16,794 | (20,541 | ) | |||||
HP A&M Receivable
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(462,730 | ) | — | |||||
Sky Ranch #5 Receivable
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(57,123 | ) | — | |||||
Accounts payable and accrued liabilities
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(116,004 | ) | 41,045 | |||||
Deferred revenues
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33,527 | (41,852 | ) | |||||
Deferred income- oil & gas lease
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(310,860 | ) | (310,860 | ) | ||||
Net cash used in operating activities
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(1,326,472 | ) | (1,594,418 | ) | ||||
Cash flows from investing activities:
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||||||||
Sales and maturities of marketable securities
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1,101,367 | 3,022,466 | ||||||
Purchase of marketable securities
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— | (1,234,967 | ) | |||||
Investments in water, water systems, and land
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(298,772 | ) | (68,855 | ) | ||||
Purchase of property and equipment
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(34,000 | ) | (3,894 | ) | ||||
Proceeds from sale of collateral stock
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3,415,000 | — | ||||||
Net cash provided by investing activities
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4,183,595 | 1,714,750 | ||||||
Cash flows from financing activities:
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Arapahoe County construction proceeds
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291,662 | 54,798 | ||||||
Payments to contingent liability holders
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(16,535 | ) | (3,520 | ) | ||||
Payments made on promissory notes payable
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(1,686,340 | ) | — | |||||
Net cash (used in) provided by financing activities
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(1,411,213 | ) | 51,278 | |||||
Net change in cash and cash equivalents
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1,445,910 | 171,610 | ||||||
Cash and cash equivalents – beginning of period
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1,623,517 | 71,795 | ||||||
Cash and cash equivalents – end of period
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$ | 3,069,427 | $ | 243,405 |
Fair Value Measurement Using | ||||||||||||||||||||||||
Cost / Other
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Quoted Prices in Active Markets for Identical Assets
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Significant Other Observable Inputs
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Significant Unobservable Inputs
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Total Unrealized
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||||||||||||||||||||
Fair Value
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Value
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(Level 1)
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(Level 2)
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(Level 3)
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Gain
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|||||||||||||||||||
Tap Participation Fee liability
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$ | 70,685,800 | $ | 70,685,800 | $ | — | $ | — | $ | 70,685,800 | $ | — |
Fair Value Measurement using Significant Unobservable Inputs (Level 3)
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Gross Estimated Tap Participation Fee Liability
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Tap Participation Fee Reported Liability
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Discount - to be imputed as interest expense in future periods
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Balance at August 31, 2012
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$ | 112,958,000 | $ | 68,269,200 | $ | 44,688,800 | ||||||
Total gains and losses (realized and unrealized):
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— | — | — | |||||||||
Imputed interest recorded as “Other Expense”
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— | 2,416,600 | (2,416,600 | ) | ||||||||
Transfers in and/or out of Level 3
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— | — | — | |||||||||
Balance at May 31, 2013
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$ | 112,958,000 | $ | 70,685,800 | $ | 42,272,200 |
May 31, 2013
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August 31, 2012
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Costs
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Accumulated Depreciation and Depletion
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Costs
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Accumulated Depreciation and Depletion
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|||||||||||||
Arkansas River Valley assets
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$ | 69,112,300 | $ | (1,444,800 | ) | $ | 69,112,300 | $ | (1,315,900 | ) | ||||||
Rangeview water supply
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14,667,000 | (7,500 | ) | 14,376,100 | (7,100 | ) | ||||||||||
Sky Ranch water rights and other costs
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3,930,500 | (72,600 | ) | 3,924,100 | (50,800 | ) | ||||||||||
Fairgrounds water and water system
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2,899,900 | (600,600 | ) | 2,899,900 | (534,500 | ) | ||||||||||
Rangeview water system
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167,700 | (71,400 | ) | 167,700 | (67,600 | ) | ||||||||||
Water supply – other
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26,900 | (21,300 | ) | 25,600 | (19,400 | ) | ||||||||||
Totals
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90,804,300 | (2,218,200 | ) | 90,505,700 | (1,995,300 | ) | ||||||||||
Net investments in water and water systems
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$ | 88,586,100 | $ | 88,510,400 | ||||||||||||
Sky Ranch land and improvements, net
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$ | 3,770,600 | $ | 3,778,500 | ||||||||||||
Total net investments in water, water systems, land and improvements
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$ | 92,356,700 | $ | 92,288,900 |
Export Water Proceeds Received
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Initial Export Water Proceeds to Pure Cycle
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Total Potential Third party Obligation
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Participating Interests Liability
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Contingency
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||||||||||||||||
Original balances
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$ | – | $ | 218,500 | $ | 31,807,700 | $ | 11,090,600 | $ | 20,717,100 | ||||||||||
Activity from inception until August 31, 2012:
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Acquisitions
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– | 28,077,500 | (28,077,500 | ) | (9,790,000 | ) | (18,287,500 | ) | ||||||||||||
Option payments - Sky Ranch and The Hills at Sky Ranch
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110,400 | (42,300 | ) | (68,100 | ) | (23,800 | ) | (44,300 | ) | |||||||||||
Arapahoe County tap fees *
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533,000 | (373,100 | ) | (159,900 | ) | (55,800 | ) | (104,100 | ) | |||||||||||
Export Water sale payments
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111,300 | (77,900 | ) | (33,400 | ) | (12,100 | ) | (21,300 | ) | |||||||||||
Balance at August 31, 2012
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754,700 | 27,802,700 | 3,468,800 | 1,208,900 | 2,259,900 | |||||||||||||||
Fiscal 2013 activity:
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||||||||||||||||||||
Export Water sale payments
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158,000 | (110,600 | ) | (47,400 | ) | (16,500 | ) | (30,900 | ) | |||||||||||
Balance at May 31, 2013
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$ | 912,700 | $ | 27,692,100 | $ | 3,421,400 | $ | 1,192,400 | $ | 2,229,000 |
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·
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New homes constructed in the area known as the 11-county “Front Range” of Colorado from the 1980’s through the valuation date. The Company utilized data for this length of time to provide development information over many economic cycles because the Company anticipates development in its targeted service area to encompass many economic cycles over the development period.
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·
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New home construction patterns for large master planned housing developments along the Front Range. The Company utilized this information because these developments are deemed comparable to projects anticipated to be constructed in the Company’s targeted service area (i.e. these master planned communities were located in predominately undeveloped areas on the outskirts of the Front Range).
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·
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Population growth rates for Colorado and the Front Range. Population growth rates were utilized to predict anticipated growth along the Front Range, which was used to predict an estimated number of new homes necessary to house the increased population.
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·
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The Consumer Price Index since the 1980’s, which was utilized to project estimated future water tap fees.
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Number of Options
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Weighted-Average Exercise Price
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Weighted-Average Remaining Contractual Term
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Approximate Aggregate Instrinsic Value
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|||||||||||||
Outstanding at beginning of period (Aug. 31, 2012)
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215,000 | $ | 5.88 | |||||||||||||
Granted
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32,500 | 3.15 | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Forfeited or expired
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— | — | ||||||||||||||
Outstanding at May 31, 2013
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247,500 | 5.52 | 6.4 | $ | 161,475 | |||||||||||
Options exercisable at May 31, 2013
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205,000 | $ | 6.03 | 5.5 | $ | 114,165 |
Number of Options
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Weighted-Average Grant Date Fair Value
|
|||||||
Non-vested options outstanding at beginning of period
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22,500 | $ | 1.72 | |||||
Granted
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32,500 | 2.36 | ||||||
Vested
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(12,500 | ) | 1.50 | |||||
Forfeited
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— | — | ||||||
Options not vested at May 31, 2013
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42,500 | $ | 2.28 |
Business segments
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Wholesale
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||||||||||||||||
water and
|
||||||||||||||||
wastewater
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Agricultural
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All Other
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Total
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|||||||||||||
Revenues
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$ | 99,700 | $ | 296,100 | $ | 17,600 | $ | 413,400 | ||||||||
Gross profit
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13,100 | 268,200 | 17,600 | 298,900 | ||||||||||||
Depletion and depreciation
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55,500 | — | — | 55,500 | ||||||||||||
Other significant noncash items:
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||||||||||||||||
Stock-based compensation
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— | — | 19,200 | 19,200 | ||||||||||||
TPF interest expense
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871,900 | — | — | 871,900 | ||||||||||||
Segment assets
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93,329,600 | 6,610,300 | 9,028,400 | 108,968,300 | ||||||||||||
Expenditures for segment assets
|
178,500 | — | — | 178,500 |
Business segments
|
||||||||||||||||
Wholesale
|
||||||||||||||||
water and
|
||||||||||||||||
wastewater
|
Agricultural
|
All Other
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Total
|
|||||||||||||
Revenues
|
$ | 272,000 | $ | 963,900 | $ | 50,500 | $ | 1,286,400 | ||||||||
Gross profit
|
34,100 | 890,000 | 50,500 | 974,600 | ||||||||||||
Depletion and depreciation
|
165,300 | — | — | 165,300 | ||||||||||||
Other significant noncash items:
|
||||||||||||||||
Stock-based compensation
|
— | — | 42,300 | 42,300 | ||||||||||||
TPF interest expense
|
2,416,600 | — | — | 2,416,600 | ||||||||||||
Segment assets
|
93,329,600 | 6,610,300 | 9,028,400 | 108,968,300 | ||||||||||||
Expenditures for segment assets
|
298,800 | — | — | 298,800 |
Three Months Ended
|
||||||||
May 31, 2013
|
May 31, 2012
|
|||||||
Accrued interest and penalties related to HP A&M receivable and related promissory notes
|
$ | 78,900 | ||||||
Increase in estimated Tap Participation Fee liability and related discount | $ | 7,450,000 | ||||||
Farm revenue allocated against the Tap Participation Fee liability and additional paid-in capital | $ | 142,300 |
|
·
|
Revenue generated from providing wholesale water and wastewater services;
|
|
·
|
Revenues generated from agricultural operations
|
|
·
|
Expenses associated with developing our water assets; and
|
|
·
|
Cash available to continue development of our water rights and service agreements.
|
Summary Table 1
|
||||||||||||||||
Three months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Millions of gallons of water delivered
|
11.8 | 6.6 | 5.2 | 79 | % | |||||||||||
Water revenues generated
|
$ | 89,700 | $ | 32,300 | $ | 57,400 | 178 | % | ||||||||
Operating costs to deliver water
|
$ | 59,600 | $ | 16,800 | $ | 42,800 | 255 | % | ||||||||
(excluding depreciation and depletion)
|
||||||||||||||||
Water delivery gross margin %
|
34 | % | 48 | % | ||||||||||||
Wastewater treatment revenues
|
$ | 10,100 | $ | 11,300 | $ | (1,200 | ) | -11 | % | |||||||
Operating costs to treat wastewater
|
$ | 4,900 | $ | 5,400 | $ | (500 | ) | -9 | % | |||||||
Wastewater treatment gross margin %
|
51 | % | 52 | % | ||||||||||||
Tap and specialty facility revenues
|
$ | 14,000 | $ | 14,000 | $ | — | 0 | % | ||||||||
Farm operations revenues
|
$ | 296,100 | $ | — | $ | 296,100 | N/A | |||||||||
Farm operating costs
|
$ | 27,900 | $ | — | $ | 27,900 | N/A | |||||||||
Farm operations gross margin %
|
91 | % | ||||||||||||||
General and administrative expenses
|
$ | 460,500 | $ | 621,200 | $ | (160,700 | ) | -26 | % | |||||||
Net losses
|
$ | 1,052,700 | $ | 1,419,900 | $ | (367,200 | ) | -26 | % |
Summary Table 1a
|
||||||||||||||||
Nine months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Millions of gallons of water delivered
|
30.8 | 17.1 | 13.7 | 80 | % | |||||||||||
Water revenues generated
|
$ | 240,600 | $ | 98,300 | $ | 142,300 | 145 | % | ||||||||
Operating costs to deliver water
|
$ | 137,800 | $ | 48,500 | $ | 89,300 | 184 | % | ||||||||
(excluding depreciation and depletion)
|
||||||||||||||||
Water delivery gross margin %
|
43 | % | 51 | % | ||||||||||||
Wastewater treatment revenues
|
$ | 31,400 | $ | 34,900 | $ | (3,500 | ) | -10 | % | |||||||
Operating costs to treat wastewater
|
$ | 12,800 | $ | 15,900 | $ | (3,100 | ) | -19 | % | |||||||
Wastewater treatment gross margin %
|
59 | % | 54 | % | ||||||||||||
Tap and specialty facility revenues
|
$ | 41,900 | $ | 41,900 | $ | — | 0 | % | ||||||||
Farm operations revenues
|
$ | 963,900 | $ | — | $ | 963,900 | N/A | |||||||||
Farm operating costs
|
$ | 74,000 | $ | — | $ | 74,000 | N/A | |||||||||
Farm operations gross margin %
|
92 | % | ||||||||||||||
General and administrative expenses
|
$ | 1,602,100 | $ | 1,804,500 | $ | (202,400 | ) | -11 | % | |||||||
Net losses
|
$ | 3,044,900 | $ | 4,145,300 | $ | (1,100,400 | ) | -27 | % |
Table 2 - Significant Balances in G&A
|
||||||||||||||||
Three months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Salary and salary related expenses:
|
||||||||||||||||
Including share-based compensation
|
$ | 155,000 | $ | 138,300 | $ | 16,700 | 12 | % | ||||||||
Excluding share-based compensation
|
$ | 135,700 | $ | 136,100 | $ | (400 | ) | 0 | % | |||||||
Professional fees
|
$ | 75,700 | $ | 196,200 | $ | (120,500 | ) | -61 | % | |||||||
Property taxes
|
$ | 57,500 | $ | — | $ | 56,700 | 100 | % | ||||||||
Water assessment fees
|
$ | 72,500 | $ | 92,500 | $ | (20,000 | ) | -22 | % | |||||||
Directors fees (including insurance)
|
$ | 11,300 | $ | 11,800 | $ | (500 | ) | -4 | % | |||||||
Public entity related expenses
|
$ | 17,100 | $ | 32,500 | $ | (15,400 | ) | -47 | % |
Table 2a - Significant Balances in G&A
|
||||||||||||||||
Nine months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Salary and salary related expenses:
|
||||||||||||||||
Including share-based compensation
|
$ | 423,700 | $ | 499,700 | $ | (76,000 | ) | -15 | % | |||||||
Excluding share-based compensation
|
$ | 381,400 | $ | 457,400 | $ | (76,000 | ) | -17 | % | |||||||
Professional fees
|
$ | 217,100 | $ | 515,900 | $ | (298,800 | ) | -58 | % | |||||||
Property taxes
|
$ | 265,600 | $ | — | $ | 265,600 | 100 | % | ||||||||
Water assessment fees
|
$ | 248,700 | $ | 269,000 | $ | (20,300 | ) | -8 | % | |||||||
Directors fees (including insurance)
|
$ | 99,500 | $ | 105,900 | $ | (6,400 | ) | -6 | % | |||||||
Public entity related expenses
|
$ | 69,200 | $ | 80,600 | $ | (11,400 | ) | -14 | % |
Table 3 - Other Items
|
||||||||||||||||
Three months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Income items:
|
||||||||||||||||
Oil and gas lease income
|
$ | 103,600 | $ | 104,600 | $ | (1,000 | ) | -1 | % | |||||||
Interest income
|
$ | 4,800 | $ | 12,800 | $ | (8,000 | ) | -63 | % | |||||||
Expense items:
|
||||||||||||||||
Depreciation and depletion
|
$ | 77,700 | $ | 77,700 | $ | — | 0 | % | ||||||||
Imputed interest
|
$ | 871,900 | $ | 873,000 | $ | (1,100 | ) | 0 | % | |||||||
Interest expense
|
$ | 73,600 | $ | — | $ | 73,600 | N/A |
Table 3a - Other Items
|
||||||||||||||||
Nine months ended:
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Income items:
|
||||||||||||||||
Oil and gas lease income
|
$ | 310,900 | $ | 319,400 | $ | (8,500 | ) | -3 | % | |||||||
Interest income
|
$ | 23,300 | $ | 42,400 | $ | (19,100 | ) | -45 | % | |||||||
Expense items:
|
||||||||||||||||
Depreciation and depletion
|
$ | 231,800 | $ | 230,400 | $ | 1,400 | 1 | % | ||||||||
Imputed interest
|
$ | 2,416,600 | $ | 2,586,800 | $ | (170,200 | ) | -7 | % | |||||||
Interest expense
|
$ | 176,800 | $ | — | $ | 176,800 | N/A |
Table 4 - Summary Cash Flows Table
|
||||||||||||||||
Nine Months Ended
|
||||||||||||||||
May 31, 2013
|
May 31, 2012
|
$ Change
|
% Change
|
|||||||||||||
Cash (used) provided by:
|
||||||||||||||||
Operating acitivities
|
$ | (1,326,500 | ) | $ | (1,594,400 | ) | $ | 267,900 | -17 | % | ||||||
Investing activities
|
$ | 4,183,600 | $ | 1,714,800 | $ | 2,468,800 | 144 | % | ||||||||
Financing activities
|
$ | (1,411,200 | ) | $ | 51,300 | $ | (1,462,500 | ) | -2851 | % |
|
·
|
At current tap fees: we estimate we would need to add 8,300 new wholesale water connections, requiring 5.7% of our water portfolio;
|
|
·
|
If tap fees increase 5.0%: we estimate we would need to add 7,900 new wholesale water connections, requiring 5.4% of our water portfolio;
|
|
·
|
If tap fees decrease 5%: we estimate we would need to add 8,700 new wholesale water connections, requiring 5.9 % of our portfolio.
|
|
·
|
the impact of housing and economic cycles on the number of connections we can serve with our water;
|
|
·
|
the number of new water connections needed to recover the costs of our Rangeview Water Supply and Arkansas River water assets;
|
|
·
|
increases in future water tap fees;
|
|
·
|
the amount of the “Tap Participation Fee” liability;
|
|
·
|
the sufficiency of our working capital and financing sources to fund our operations;
|
|
·
|
impairments in carrying amounts of long-lived assets;
|
|
·
|
changes in unrecognized tax positions;
|
|
·
|
forfeitures of option grants and vesting of non-vested options;
|
|
·
|
the impact of new accounting pronouncements;
|
|
·
|
the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting;
|
|
·
|
plans for the use and development of our water assets;
|
|
·
|
our plans to provide water for drilling and “fracking” oil and gas wells;
|
|
·
|
expected development and growth in the area referred to as the “Front Range” of Colorado;
|
|
·
|
management of farms and the generation of revenues from such management;
|
|
·
|
anticipated results of foreclosure proceedings to which our properties and water rights are subject;
|
|
·
|
claims of HP A&M against the Company;
|
|
·
|
litigation with the Land Board and HP A&M;
|
|
·
|
our ability to reduce the Tap Participation Fee and recover damages from HP A&M;
|
|
·
|
expectations regarding arbitration with the Land Board;
|
|
·
|
our belief that we and the District are conducting our operations in accordance with the Lease; and
|
|
·
|
future fluctuations in the price and trading volume of our common stock.
|
31
|
||
32
|
||
101
|
The following financial information from our Quarterly Report on Form 10-Q for the period ending May 31, 2013, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the consolidated balance sheets as of May 31, 2013 and August 31, 2012, (ii) the consolidated statements of operations for the three and nine months ended May 31, 2013 and 2012, (iii) the consolidated statements of cash flows for the nine months ended May 31, 2013 and 2012, and (iv) the notes to the consolidated financial statements, tagged in accordance with Rule 406T.*+
|
|
*
|
Filed herewith.
|
|
+
|
In accordance with Rule 406T of Regulation S-T, information in Exhibit 101 is “furnished” and not “filed.”
|
/s/ Mark W. Harding
|
||
Mark W. Harding
|
||
President and Chief Financial Officer
|
||
July 11, 2013
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Pure Cycle Corporation;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusion about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
(d)
|
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
|
5.
|
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
Dated: July 11, 2013
|
||
/s/ Mark W. Harding
|
||
Mark W. Harding
|
||
Principal Executive Officer and Principal Financial Officer
|
(1)
|
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
|
/s/ Mark W. Harding
|
||
Mark W. Harding
|
||
Principal Executive Officer and Principal Financial Officer
|
||
July 11, 2013
|
||
Presentation of Interim Information (Policies)
|
9 Months Ended |
---|---|
May 31, 2013
|
|
Presentation Of Interim Information Policies | |
Use of Estimates | Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
Cash and Cash Equivalents |
Cash and Cash Equivalents
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 high quality financial institution in an account which at various times during the three and nine months ended May 31, 2013, exceeded federally insured limits. At various times during the three and nine months ended May 31, 2013, the Company’s main operating account exceeded federally insured limits. |
Financial Instruments - Concentration of Credit Risk and Fair Value | Financial Instruments – Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and marketable securities. The Company places its cash equivalents and investments with high quality financial institutions. The Company invests its cash primarily in certificates of deposits, money market instruments, 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 instruments for which it is practicable to estimate that value.
Current Assets and Liabilities – The amounts reported on the balance sheets for cash and cash equivalents, trade receivables, and trade payables approximate their fair values because of the short maturity of these instruments.
The amounts reported on the balance sheets for marketable securities represent the fair values of the underlying instruments as reported by the financial institutions where the funds are held as of August 31, 2012. The Company has recorded an accumulated net unrealized loss on its marketable securities of $1,081 as of August 31, 2012. The unrealized loss was the result of changes in interest rates in the market. As of May 31, 2013, the Company is not holding any marketable securities in an effort to create liquidity while the Company is in the process of curing the defaults by High Plains A&M, LLC (“HP A&M”).
Notes Receivable and Construction Proceeds Receivable – The amounts reported on the balance sheets for notes receivable and construction proceeds receivable approximate fair value as they bear interest at rates which are comparable to current market rates.
The fair value of the Note Receivable – related party Rangeview Metropolitan District (the “District”) is not practical to estimate due to the related party nature of the underlying transaction.
Receivable from HP A&M – As described in Note 4 – Long-Term Obligations and Operating Lease below, HP A&M defaulted on certain promissory notes payable to third parties which are secured by real property and water rights owned by the Company. To protect its property and water rights, the Company has purchased certain of the HP A&M notes. The Company has the right to recover from HP A&M all costs and expenses, including reasonable attorneys’ fees, incurred by the Company in curing the defaulted notes and in protecting its right and title to the property and water rights securing the notes. The Company has recorded the entire amount of the HP A&M notes purchased by the Company and the value of remaining notes the Company is currently negotiating to purchase as a receivable from HP A&M net of the $3.4 million in proceeds received from the sale of 1.5 million shares of the Company’s Common Stock held as pledged assets. The short term portion of the receivable represents the amount of the defaulted promissory notes payable by HP A&M which were purchased by the Company as of May 31, 2013, due within the next 12 months. The carrying value of the accounts receivable approximate the fair value as the rates are comparable to market rates.
Long-term Financial Liabilities – The Comprehensive Amendment Agreement No. 1 (the “CAA” as further described in Note 4 – Long-Term Obligations and Operating Lease below) 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 Assets to the 2012 Annual Report). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined in Note 4 – Water Assets to the 2012 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.
The recorded balance of the “Tap Participation Fee” liability (as described below and in Note 4 - Long-Term Obligations and Operating Lease below) is its estimated fair value determined by projecting new home development in the Company’s targeted service area over an estimated development period.
Notes Payable – As of May 31, 2013, the Company has acquired approximately $6.9 million of the $9.6 million of promissory notes that are payable by HP A&M to third parties. These promissory notes were acquired with cash payments of approximately $1.4 million and the issuance of approximately $5.6 million of notes by the Company, the majority of which have a five-year term, bear interest at an annual rate of five percent (5%), and require semi-annual payments with a straight-line amortization schedule. The carrying value of the notes payable approximate the fair value as the rates are comparable to market rates. |
Tap Participation Fee |
Tap Participation Fee
This note should be read in conjunction with Note 4 – Long-Term Obligations and Operating Lease below.
Pursuant to the Asset Purchase Agreement (the “Arkansas River Agreement”) dated May 10, 2006, the Company is obligated to pay HP A&M a defined percentage of a defined number of water tap fees the Company receives after the date of the Arkansas River Agreement. A Tap Participation Fee is due and payable once the Company has sold a water tap and received the consideration due for such water tap. The Company did not sell any water taps during the three or nine months ended May 31, 2013 or 2012.
The Company imputes interest expense on the unpaid Tap Participation Fee using the effective interest method over an estimated period which is utilized in the valuation of the liability. The Company imputed interest of $871,900 and $873,000 during the three months ended May 31, 2013 and 2012, respectively. The Company imputed interest of $2,416,600 and $2,586,800 during the nine months ended May 31, 2013 and 2012, respectively.
At May 31, 2013, there remain 19,427 water taps subject to the Tap Participation Fee. |
Revenue Recognition | Revenue Recognition
Tap and Construction Fees – In August 2005, the Company entered into the Water Service Agreement (the “County Agreement”) with Arapahoe County (the “County”). In fiscal 2006, the Company began recognizing water tap fees as revenue ratably over the estimated service period upon completion of the “Wholesale Facilities” (defined in the 2012 Annual Report) constructed to provide service to the County. The Company recognized $3,600 of water tap fee revenues during each of the three months ended May 31, 2013 and 2012, respectively. The Company recognized $10,700 of water tap fee revenues during each of the nine months ended May 31, 2013 and 2012, respectively. The water tap fees to be recognized over this period are net of the royalty payments to the State of Colorado Board of Land Commissioners (the “Land Board”) and amounts paid to third parties pursuant to the CAA as further described in Note 4 – Long-Term Obligations and Operating Lease below.
The Company recognized $10,400 of “Special Facilities” (defined in the 2012 Annual Report) funding as revenue during each of the three months ended May 31, 2013 and 2012, respectively. The Company recognized $31,100 of Special Facilities funding as revenue during each of the nine months ended May 31, 2013 and 2012, respectively. This is the ratable portion of the Special Facilities funding proceeds received from the County pursuant to the County Agreement as more fully described in Note 4 – Water Assets to the 2012 Annual Report.
As of May 31, 2013, the Company has deferred recognition of $1.3 million of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.
Farm Operations – The Company leases its Arkansas River water and land to area farmers who actively farm the properties. Prior to August 3, 2012, pursuant to a property management agreement between HP A&M and the Company (the “Property Management Agreement”), HP A&M received a management fee equal to 100% of the income from the land and water leases. As a result, the Company presented its land and water lease income net of the management fees paid to HP A&M. Effective August 3, 2012, the Company terminated the Property Management Agreement due to a default by HP A&M on certain promissory notes secured by deeds of trust on the land and water purchased by the Company from HP A&M in 2006. Effective August 3, 2012, the Company manages the land and water leases and the income from the land and water leases became payable to the Company. Pursuant to the farm lease agreements, the Company bills the lessees semi-annually in March and November. The lease billings include minimum billings and adjustments based on actual water deliveries by the Fort Lyon Canal Company (“FLCC”) or are based on crop yields. Subsequent to August 3, 2012, the Company records farm lease income ratably each month based on estimated annual lease income the Company anticipates collecting from its land and water leases. The Company recorded these amounts as receivables, less an estimated allowance for uncollectible accounts. The allowance as of May 31, 2013, was determined by the Company’s specific review of all past due accounts. The Company has recorded allowances for doubtful accounts totaling $41,100 and $20,400 as of May 31, 2013 and August 31, 2012, respectively. As of May 31, 2013 the company has recorded deferred revenue of $82,565 on its farm income related to billings for future periods. The Company manages the farm lease business as a separate line of business from the wholesale water and wastewater business.
Royalty and other obligations – Revenues from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the sale of water on the “Lowry Range” (described in Note 4 – Water Assets to the 2012 Annual Report) are shown net of the royalties to the Land Board and the amounts retained by the District.
Oil
and Gas Lease Payments – As further described in Note 2 – Summary
of Significant Accounting Policies to the 2012 Annual Report, on March 10, 2011, the Company entered into a
Paid-Up Oil and Gas Lease (the “O&G Lease”) and a Surface Use and Damage Agreement (the “Surface Use
Agreement”) with Anadarko E&P Company, L.P. (“Anadarko”), a wholly owned subsidiary of Anadarko
Petroleum Company. In December of 2012 the O&G Lease was purchased by a wholly owned subsidiary of ConocoPhillips
Company. Pursuant to the O&G Lease, during the year ended August 31, 2011, the Company received up-front payments of
$1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of
mineral estate owned by the Company at its “Sky Ranch” property (described in Note 4 – Water
Assets to the 2012 Annual Report). The Company began recognizing the up-front payments as income on a straight-line
basis over three years (the initial term of the O&G Lease) on March 10, 2011. During the three months ended May 31, 2013
and 2012, the Company recognized $103,600 and $104,600, respectively, of income and royalty related to the up-front payments
received pursuant to the O&G Lease. During the nine months ended May 31, 2013 and 2012, the Company recognized $310,900
and $319,400, respectively, of income and royalty related to the up-front payments received pursuant to the O&G
Lease.
As of May 31, 2013, the Company has deferred recognition of $328,100 of income related to the O&G Lease, which will be recognized into income ratably through February 2014. |
Capitalized Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets | Capitalized Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to thirty years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being utilized on the basis of units produced (i.e. thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees. |
Share-based Compensation | Share-based Compensation
The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options has no impact on the income tax provisions.
The Company recognized $19,200 and $2,100 of share-based compensation expense during the three months ended May 31, 2013 and 2012, respectively. During each of the nine months ended May 31, 2013 and 2012, the Company recognized $42,300 of share-based compensation expense. |
Income Tax | Income taxes
The Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of May 31, 2013.
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 2010 through fiscal 2012. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve 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 May 31, 2013, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three or nine months ended May 31, 2013 and 2012. |
Loss per Common Share | 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 247,600 and 263,100 common share equivalents were outstanding as of May 31, 2013 and 2012, respectively, and have been excluded from the calculation of loss per common share as their effect is anti-dilutive. |
Recently Issued Accounting Pronouncements | 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 assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 (September 1, 2012 for the Company). The adoption of ASU 2011-05 did not have a material impact on its results of operations, financial condition or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02). ASU 2013-02 finalizes Proposed ASU No. 2012-240, and seeks to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 (September 1, 2013 for the Company). The adoption of ASU 2013-02 will not have a material impact on its results of operations, financial condition or cash flows. |
Consolidated Statements of Comprehensive Loss (Unaudited) (USD $)
|
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
May 31, 2013
|
May 31, 2012
|
May 31, 2013
|
May 31, 2012
|
|
Revenues: | ||||
Metered water usage | $ 89,666 | $ 32,301 | $ 240,593 | $ 98,301 |
Wastewater treatment fees | 10,069 | 11,315 | 31,384 | 34,944 |
Farm operations | 296,085 | 963,935 | ||
Special facility funding recognized | 10,377 | 10,377 | 31,131 | 31,131 |
Water tap fees recognized | 3,574 | 3,574 | 10,721 | 10,722 |
Other | 3,673 | 8,603 | ||
Total revenues | 413,444 | 57,567 | 1,286,367 | 175,098 |
Expenses: | ||||
Water service operations | (59,552) | (16,779) | (137,820) | (48,496) |
Wastewater service operations | (4,898) | (5,429) | (12,842) | (15,944) |
Farm operations | (27,867) | (73,967) | ||
Depletion and depreciation | (22,198) | (22,114) | (66,514) | (66,304) |
Other | (20,673) | |||
Total cost of revenues | (114,515) | (44,322) | (311,816) | (130,744) |
Gross margin | 298,929 | 13,245 | 974,551 | 44,354 |
General and administrative expenses | (460,479) | (621,243) | (1,602,130) | (1,804,474) |
Depreciation | (55,481) | (55,574) | (165,308) | (164,066) |
Operating loss | (217,031) | (663,572) | (792,887) | (1,924,186) |
Other income (expense): | ||||
Oil and gas lease income, net | 103,620 | 104,580 | 310,860 | 319,379 |
Interest income | 4,762 | 12,837 | 24,429 | 42,415 |
Other | 1,395 | (791) | 6,176 | 3,912 |
Interest expense | (73,627) | (176,837) | ||
Interest imputed on the Tap Participation Fee payable to HP A&M | (871,864) | (872,980) | (2,416,619) | (2,586,780) |
Net loss | (1,052,745) | (1,419,926) | (3,044,878) | (4,145,260) |
Unrealized gain on marketable securities | 56 | (720) | 1,081 | 2,715 |
Comprehensive Loss | $ (1,052,689) | $ (1,420,646) | $ (3,043,797) | $ (4,142,545) |
Net loss per common share - basic and diluted (in Dollars per share) | $ (0.04) | $ (0.06) | $ (0.13) | $ (0.17) |
Weighted average common shares outstanding - basic and diluted (in Shares) | 24,037,596 | 24,037,596 | 24,037,596 | 24,037,596 |
Stockholders' Equity
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May 31, 2013
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Shareholders' Equity | NOTE 5 – SHAREHOLDERS’ EQUITY
The Company maintains the 2004 Incentive Plan (the “Equity Plan”), which was approved by shareholders in April 2004. Executives, eligible employees, consultants and non-employee directors are eligible to receive options and stock grants pursuant to the Equity Plan. Pursuant to the 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 initially reserved 1.6 million shares of common stock for issuance under the Equity Plan. At May 31, 2013, the Company had 1,318,311 common shares remaining that can be granted to eligible participants pursuant to the Equity Plan.
The following table summarizes the stock option activity for the Equity Plan for the nine months ended May 31, 2013:
The following table summarizes the activity and value of non-vested options as of and for the nine months ended May 31, 2013:
All non-vested options are expected to vest. The total fair value of options vested during the three and nine months ended May 31, 2013 and 2012 was $18,800 and $38,900, respectively.
Stock-based compensation expense for the three months ended May 31, 2013 and 2012, was $19,200 and $13,600, respectively. Stock-based compensation expense for the nine months ended May 31, 2013 and 2012, was $42,300 and $42,300, respectively.
At May 31, 2013, the Company had unrecognized expenses relating to non-vested options that are expected to vest totaling $51,200 which have a weighted average life of less than 1 year. The Company has not recorded any excess tax benefits to additional paid-in capital. |
Fair Value Measurements (Tables)
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May 31, 2013
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Fair Value Measurements Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value, Assets Measured on Recurring Basis |
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of May 31, 2013:
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Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation | Although not required, the Company deems the following table, which presents the changes in the Tap Participation Fee for the nine months ended May 31, 2013, to be helpful to the users of its consolidated financial statements:
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Segment Information (Details Narrative)
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9 Months Ended |
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May 31, 2012
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Segment Information Details Narrative | |
Number of Operating Segments | 1 |
Investments in Water, Water Systems, Land and Improvements (Detail Narrative) (USD $)
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3 Months Ended | 9 Months Ended | |||
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May 31, 2013
acre
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May 31, 2012
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May 31, 2013
acre
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May 31, 2012
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Aug. 31, 2012
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Depletion | $ 100 | $ 100 | $ 300 | $ 300 | |
Depreciation, total | 77,600 | 77,600 | 231,500 | 230,100 | |
Number of FLCC Shares | 16,882 | 16,882 | |||
Acres of land to be sold | 1,471 | 1,471 | |||
Assets Held-for-sale, Long Lived | $ 5,748,630 | $ 5,748,630 | $ 5,748,630 | ||
Rangeview Water Supply And Water System
|
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Number of FLCC Shares | 3,397 |
Fair Value Measurements (Details 1) (USD $)
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9 Months Ended |
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May 31, 2013
|
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Discount To Be Imputed As Interest Expense In Future Periods
|
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Balance, beginning | $ 112,958,000 |
Total gains and losses (realized and unrealized) | |
Imputed interest recorded as "Other Expense" | |
Transfers in and/or out of Level 3 | |
Balance, ending | 112,958,000 |
Tap Participation Fee Report Liability
|
|
Balance, beginning | 68,269,200 |
Total gains and losses (realized and unrealized) | |
Imputed interest recorded as "Other Expense" | 2,416,600 |
Transfers in and/or out of Level 3 | |
Balance, ending | 70,685,800 |
Gross Estimated Tap Participation Fee Liability
|
|
Balance, beginning | 44,688,800 |
Total gains and losses (realized and unrealized) | |
Imputed interest recorded as "Other Expense" | (2,416,600) |
Transfers in and/or out of Level 3 | |
Balance, ending | $ 42,272,200 |
Related Party Transactions (Details Narrative) (USD $)
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3 Months Ended | 9 Months Ended | ||
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May 31, 2013
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May 31, 2012
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May 31, 2013
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May 31, 2012
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Related Party Transactions Details Narrative | ||||
Related Party Transaction, Amounts of Transaction | $ 50,000 | $ 7,000 | $ 89,500 | $ 39,700 |
Due from Related Parties | 250,000 | 250,000 | ||
Debt Instrument, Basis Spread on Variable Rate | 2.00% | |||
Related Party Transaction, Rate | 5.25% | |||
Notes Receivable, Related Parties | 552,900 | 552,900 | ||
Due from Related Parties, Principal | 229,300 | 229,300 | ||
Due from Related Parties, Interest | $ 323,600 | $ 323,600 |
Supplemental Disclosures Of Non-cash Activities (Details) (USD $)
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9 Months Ended | |
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May 31, 2012
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May 31, 2013
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Supplemental Disclosures Of Non-Cash Activities Details | ||
Accrued interest and penalties related to HP A&M receivable and related promissory notes | $ 78,900 | |
Increase in estimated Tap Participation Fee liability and related discount | 7,450,000 | |
Farm revenue allocated against the Tap Participation Fee liability and additional paid-in capital | $ 142,300 |
Shareholders' Equity (Details Narrative) (USD $)
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3 Months Ended | 9 Months Ended | |||
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May 31, 2013
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May 31, 2012
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May 31, 2013
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May 31, 2012
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Apr. 30, 2004
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Shareholders Equity Details Narrative | |||||
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized (in Shares) | 1,600,000 | ||||
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant (in Shares) | 1,318,311 | 1,318,311 | |||
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value | $ 18,800 | $ 18,800 | $ 38,900 | $ 38,900 | |
Share-based Compensation | 19,200 | 13,600 | 42,300 | 42,300 | |
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized | $ 51,200 | $ 51,200 |
Fair Value Measurements (Details) (USD $)
|
May 31, 2013
|
Aug. 31, 2012
|
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Tap Participation Fee liability | $ 70,685,795 | $ 68,269,176 |
Fair Value, Inputs, Level 1 [Member]
|
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Tap Participation Fee liability | ||
Fair Value, Inputs, Level 2
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Tap Participation Fee liability | ||
Fair Value, Inputs, Level 3
|
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Tap Participation Fee liability | 70,685,800 | |
Fair Value
|
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Tap Participation Fee liability | 70,685,800 | |
Cost/Other Value
|
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Tap Participation Fee liability | 70,685,800 | |
Total Unrealized Gain
|
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Tap Participation Fee liability |
Presentation of Interim Information
|
9 Months Ended |
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May 31, 2013
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Presentation Of Interim Information | |
Presentation of Interim Information | NOTE 1 – PRESENTATION OF INTERIM INFORMATION
The May 31, 2013 consolidated balance sheet, the consolidated statements of comprehensive loss for the three and nine months ended May 31, 2013 and 2012, respectively and the consolidated statements of cash flows for the nine months ended May 31, 2013 and 2012, respectively, have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at May 31, 2013, and for all periods presented have been made appropriately.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 2012 Annual Report on Form 10-K (the “2012 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 28, 2012. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full fiscal year. The August 31, 2012 balance sheet was derived directly from the Company’s audited financial statements.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a high quality financial institution in an account which at various times during the three and nine months ended May 31, 2013, exceeded federally insured limits. At various times during the three and nine months ended May 31, 2013, the Company’s main operating account exceeded federally insured limits.
Financial Instruments – Concentration of Credit Risk and Fair Value
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents and marketable securities. The Company places its cash equivalents and investments with high quality financial institutions. The Company invests its cash primarily in certificates of deposits, money market instruments, 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 instruments for which it is practicable to estimate that value.
Current Assets and Liabilities – The amounts reported on the balance sheets for cash and cash equivalents, trade receivables, and trade payables approximate their fair values because of the short maturity of these instruments.
The
amounts reported on the balance sheets for marketable securities represent the fair values of the underlying instruments
as reported by the financial institutions where the funds are held as of August 31, 2012. The Company has recorded
an accumulated net unrealized loss on its marketable securities of $1,081 as of August 31, 2012. The unrealized loss was
the result of changes in interest rates in the market. As of May 31, 2013, the Company is not holding any marketable
securities in an effort to create liquidity while the Company is in the process of curing the defaults by High Plains
A&M, LLC (“HP A&M”).
Notes Receivable and Construction Proceeds Receivable – The amounts reported on the balance sheets for notes receivable and construction proceeds receivable approximate fair value as they bear interest at rates which are comparable to current market rates.
The fair value of the Note Receivable – related party Rangeview Metropolitan District (the “District”) is not practical to estimate due to the related party nature of the underlying transaction.
Receivable from HP A&M – As described in Note 4 – Long-Term Obligations and Operating Lease below, HP A&M defaulted on certain promissory notes payable to third parties which are secured by real property and water rights owned by the Company. To protect its property and water rights, the Company has purchased certain of the HP A&M notes. The Company has the right to recover from HP A&M all costs and expenses, including reasonable attorneys’ fees, incurred by the Company in curing the defaulted notes and in protecting its right and title to the property and water rights securing the notes. The Company has recorded the entire amount of the HP A&M notes purchased by the Company and the value of remaining notes the Company is currently negotiating to purchase as a receivable from HP A&M net of the $3.4 million in proceeds received from the sale of 1.5 million shares of the Company’s Common Stock held as pledged assets. The short term portion of the receivable represents the amount of the defaulted promissory notes payable by HP A&M which were purchased by the Company as of May 31, 2013, due within the next 12 months. The carrying value of the accounts receivable approximate the fair value as the rates are comparable to market rates.
Long-term Financial Liabilities – The Comprehensive Amendment Agreement No. 1 (the “CAA” as further described in Note 4 – Long-Term Obligations and Operating Lease below) 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 Assets to the 2012 Annual Report). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined in Note 4 – Water Assets to the 2012 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.
The recorded balance of the “Tap Participation Fee” liability (as described below and in Note 4 - Long-Term Obligations and Operating Lease below) is its estimated fair value determined by projecting new home development in the Company’s targeted service area over an estimated development period.
Notes Payable – As of May 31, 2013, the Company has acquired approximately $6.9 million of the $9.6 million of promissory notes that are payable by HP A&M to third parties. These promissory notes were acquired with cash payments of approximately $1.4 million and the issuance of approximately $5.6 million of notes by the Company, the majority of which have a five-year term, bear interest at an annual rate of five percent (5%), and require semi-annual payments with a straight-line amortization schedule. The carrying value of the notes payable approximate the fair value as the rates are comparable to market rates.
Tap Participation Fee
This note should be read in conjunction with Note 4 – Long-Term Obligations and Operating Lease below.
Pursuant to the Asset Purchase Agreement (the “Arkansas River Agreement”) dated May 10, 2006, the Company is obligated to pay HP A&M a defined percentage of a defined number of water tap fees the Company receives after the date of the Arkansas River Agreement. A Tap Participation Fee is due and payable once the Company has sold a water tap and received the consideration due for such water tap. The Company did not sell any water taps during the three or nine months ended May 31, 2013 or 2012.
The Company imputes interest expense on the unpaid Tap Participation Fee using the effective interest method over an estimated period which is utilized in the valuation of the liability. The Company imputed interest of $871,900 and $873,000 during the three months ended May 31, 2013 and 2012, respectively. The Company imputed interest of $2,416,600 and $2,586,800 during the nine months ended May 31, 2013 and 2012, respectively.
At May 31, 2013, there remain 19,427 water taps subject to the Tap Participation Fee.
Revenue Recognition
Tap
and Construction Fees – In August 2005, the Company entered into the Water Service Agreement (the “County
Agreement”) with Arapahoe County (the “County”). In fiscal 2006, the Company began recognizing water tap fees
as revenue ratably over the estimated service period upon completion of the “Wholesale Facilities” (defined in the
2012 Annual Report) constructed to provide service to the County. The Company recognized $3,600 of water tap fee revenues during
each of the three months ended May 31, 2013 and 2012, respectively. The Company recognized $10,700 of water tap fee revenues during
each of the nine months ended May 31, 2013 and 2012, respectively. The water tap fees to be recognized over this period are net
of the royalty payments to the State of Colorado Board of Land Commissioners (the “Land Board”) and amounts paid to
third parties pursuant to the CAA as further described in Note 4 – Long-Term Obligations and Operating Lease below.
The Company recognized $10,400 of “Special Facilities” (defined in the 2012 Annual Report) funding as revenue during each of the three months ended May 31, 2013 and 2012, respectively. The Company recognized $31,100 of Special Facilities funding as revenue during each of the nine months ended May 31, 2013 and 2012, respectively. This is the ratable portion of the Special Facilities funding proceeds received from the County pursuant to the County Agreement as more fully described in Note 4 – Water Assets to the 2012 Annual Report.
As of May 31, 2013, the Company has deferred recognition of $1.3 million of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.
Farm Operations – The Company leases its Arkansas River water and land to area farmers who actively farm the properties. Prior to August 3, 2012, pursuant to a property management agreement between HP A&M and the Company (the “Property Management Agreement”), HP A&M received a management fee equal to 100% of the income from the land and water leases. As a result, the Company presented its land and water lease income net of the management fees paid to HP A&M. Effective August 3, 2012, the Company terminated the Property Management Agreement due to a default by HP A&M on certain promissory notes secured by deeds of trust on the land and water purchased by the Company from HP A&M in 2006. Effective August 3, 2012, the Company manages the land and water leases and the income from the land and water leases became payable to the Company. Pursuant to the farm lease agreements, the Company bills the lessees semi-annually in March and November. The lease billings include minimum billings and adjustments based on actual water deliveries by the Fort Lyon Canal Company (“FLCC”) or are based on crop yields. Subsequent to August 3, 2012, the Company records farm lease income ratably each month based on estimated annual lease income the Company anticipates collecting from its land and water leases. The Company recorded these amounts as receivables, less an estimated allowance for uncollectible accounts. The allowance as of May 31, 2013, was determined by the Company’s specific review of all past due accounts. The Company has recorded allowances for doubtful accounts totaling $41,100 and $20,400 as of May 31, 2013 and August 31, 2012, respectively. As of May 31, 2013 the company has recorded deferred revenue of $82,565 on its farm income related to billings for future periods. The Company manages the farm lease business as a separate line of business from the wholesale water and wastewater business.
Royalty and other obligations – Revenues from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the sale of water on the “Lowry Range” (described in Note 4 – Water Assets to the 2012 Annual Report) are shown net of the royalties to the Land Board and the amounts retained by the District.
Oil
and Gas Lease Payments – As further described in Note 2 – Summary
of Significant Accounting Policies to the 2012 Annual Report, on March 10, 2011, the Company entered into a
Paid-Up Oil and Gas Lease (the “O&G Lease”) and a Surface Use and Damage Agreement (the “Surface Use
Agreement”) with Anadarko E&P Company, L.P. (“Anadarko”), a wholly owned subsidiary of Anadarko
Petroleum Company. In December of 2012 the O&G Lease was purchased by a wholly owned subsidiary of ConocoPhillips
Company. Pursuant to the O&G Lease, during the year ended August 31, 2011, the Company received up-front payments of
$1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of
mineral estate owned by the Company at its “Sky Ranch” property (described in Note 4 – Water
Assets to the 2012 Annual Report). The Company began recognizing the up-front payments as income on a straight-line
basis over three years (the initial term of the O&G Lease) on March 10, 2011. During the three months ended May
31, 2013 and 2012, the Company recognized $103,600 and $104,600, respectively, of income and royalty related to the up-front
payments received pursuant to the O&G Lease. During the nine months ended May 31, 2013 and 2012, the Company recognized
$310,900 and $319,400, respectively, of income and royalty related to the up-front payments received pursuant to the O&G
Lease.
As of May 31, 2013, the Company has deferred recognition of $328,100 of income related to the O&G Lease, which will be recognized into income ratably through February 2014.
Capitalized Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets
Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to thirty years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being utilized on the basis of units produced (i.e. thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.
Share-based Compensation
The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options has no impact on the income tax provisions.
The Company recognized $19,200 and $2,100 of share-based compensation expense during the three months ended May 31, 2013 and 2012, respectively. During each of the nine months ended May 31, 2013 and 2012, the Company recognized $42,300 of share-based compensation expense.
Income taxes
The Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of May 31, 2013.
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 2010 through fiscal 2012. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve 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 May 31, 2013, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three or nine months ended May 31, 2013 and 2012.
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 247,600 and 263,100 common share equivalents were outstanding as of May 31, 2013 and 2012, respectively, and 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 assures that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 (September 1, 2012 for the Company). The adoption of ASU 2011-05 did not have a material impact on its results of operations, financial condition or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02). ASU 2013-02 finalizes Proposed ASU No. 2012-240, and seeks to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 (September 1, 2013 for the Company). The adoption of ASU 2013-02 will not have a material impact on its results of operations, financial condition or cash flows. |
Investments in Water, Water Systems, Land and Improvements
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May 31, 2013
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Investments in Water, Water Systems, Land and Improvements |
NOTE 3 – INVESTMENTS IN WATER, WATER SYSTEMS, LAND AND IMPROVEMENTS
The Company’s water rights and current water and wastewater service agreements are more fully described in Note 4 – Water Assets to the 2012 Annual Report. There have been no significant changes to the Company’s water rights or water and wastewater service agreements during the three and nine months ended May 31, 2013.
The Company’s water, water systems, land and improvements consist of the following costs and accumulated depreciation and depletion at May 31, 2013 and August 31, 2012:
Capitalized terms in this section not defined herein are defined in Note 4 – Water Assets to the 2012 Annual Report.
Depletion and Depreciation. The Company recorded $100 of depletion charges during each of the three month periods ended May 31, 2013 and 2012, respectively. The Company recorded $300 of depletion charges during each of the nine month periods ended May 31, 2013 and 2012. This related entirely to the Rangeview Water Supply. No depletion is taken against the Arkansas River water or Sky Ranch Water Supply because the water located at these locations is not yet being utilized for its intended purpose as of May 31, 2013.
The Company recorded $77,600 of depreciation expense during each of the three months ended May 31, 2013 and 2012. The Company recorded $231,500 and $230,100 of depreciation expense during the nine months ended May 31, 2013 and 2012, respectively.
Land and Water Shares Held for Sale. During fiscal 2012, management decided to sell certain farms in order to have cash flows sufficient to acquire the notes defaulted upon by HP A&M and to meet the future obligations on the promissory notes the Company issued to purchase the defaulted notes owed by HP A&M. The Company has entered into or is in the process of negotiating agreements to sell 1,471 acres of land along with 3,397 FLCC shares associated with this land. The assets held for sale total $5.7 million, which is the lower of cost or fair value less cost to sell. |
Related Party Transactions
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9 Months Ended |
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May 31, 2013
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Related Party Transactions [Abstract] | |
Related Party Transactions | NOTE 6 – RELATED PARTY TRANSACTIONS
On
December 16, 2009, the Company entered into a Participation Agreement with the District, whereby the Company agreed to provide
funding to the District in connection with the District joining the South Metro Water Supply Authority (“SMWSA”).
During the three months ended May 31, 2013 and 2012, the Company provided $50,000 and $7,000 of funding to the District pursuant
to the Participation Agreement, respectively. During the nine months ended May 31, 2013 and 2012, the Company provided $89,500
and $39,700 of funding to the District pursuant to the Participation Agreement, respectively. These amounts were expensed
at the time of funding.
In 1995, the Company extended a loan to the District, a related party. The loan provided for borrowings of up to $250,000, is unsecured, bears interest based on the prevailing prime rate plus 2% (5.25% at May 31, 2013) and matures on December 31, 2013. The Company intends to extend the maturity date of the loan to December 31, 2014. The $552,900 balance of the note receivable at May 31, 2013, includes borrowings of $229,300 and accrued interest of $323,600. |
Long-Term Obligations and Operating Lease
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Long-Term Obligations and Operating Lease | NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE
The Participating Interests in Export Water Supply and the Tap Participation Fee payable to HP A&M are obligations of the Company that have no scheduled maturity dates. Therefore, these liabilities are not disclosed in tabular format, but they are described below.
Participating Interests in Export Water Supply
The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990’s. 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 Assets to the 2012 Annual Report). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investments. 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, 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.
In fiscal years 2007 and 2008, in order to reduce the long term impact of the CAA, the Company repurchased various portions of the CAA obligations in priority. The Company did not make any CAA acquisitions during the three or nine months ended May 31, 2013 and 2012. As a result of the acquisitions, and due to the sale of Export Water, as detailed in the table below, the remaining potential third party obligation at May 31, 2013, is $3.4 million:
* 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 three payees receive their full payment before the next priority level receives any payment and so on until full repayment. The Company will receive $5.1 million of the first priority payout (the remaining entire first priority payout totals $7.3 million as of May 31, 2013).
Arkansas River Agreement Obligations
The
Tap Participation Fee. The $70.7 million Tap Participation Fee liability at May 31, 2013, represents the estimated
discounted fair value of the Company’s obligation to pay HP A&M 20% of the Company’s gross proceeds, or the
equivalent thereof, from the sale of the next 19,427 water taps sold by the Company. Initially the obligation was to pay 10%
of the Company’s gross proceeds, or the equivalent thereof, from the sale of 40,000 water taps sold after the date of
the Arkansas River Agreement. The 40,000 water taps were reduced to 19,427 water taps as a result of (i) sales of Arkansas
River Valley land in 2006 and 2009, (ii) the sale of unutilized water rights owned by the Company in the Arkansas River
Valley in 2007, (iii) the election made by HP A&M, effective September 1, 2011, pursuant to the Arkansas River Agreement,
to increase the Tap Participation Fee percentage from 10% to 20%, and to take a corresponding 50% reduction in the number of
taps subject to the Tap Participation Fee, and (iv) the allocation of 26.9% of the Net Revenues (defined as all lease and
related income received from the farms less employee expenses, direct expenses for managing the leases and a reasonable
overhead allocation) received by HP A&M from management of the farm leasing operations from September 1, 2011 to August
3, 3012 prior to termination of the Property Management Agreement.
The fair value of the Tap Participation Fee liability is an estimate prepared by management of the Company. The fair value of the liability is based on discounted estimated cash flows subject to the Tap Participation Fee calculated by projecting future annual water tap sales for the number of taps subject to the Tap Participation Fee at the date of valuation. Future cash flows from water tap sales are estimated by utilizing the following historical information, where available:
Utilizing
this historical information, the Company projected an estimated new home development pattern in its targeted service
area sufficient to cover the sale of the water taps subject to the Tap Participation Fee at the date of the revaluation,
which was September 1, 2011. The estimated proceeds generated from the sale of those water taps resulted in estimated
payments to HP A&M over the life of the projected development period of $120.6 million, which is an increase of $7.5
million from the previous valuation completed in fiscal 2009. The estimated payments to HP A&M are then discounted to the
current valuation date and the difference between the amount reflected on the Company’s balance sheet at the valuation
date and the total estimated payments is imputed as interest expense over the estimated development time using the effective
interest method. The implied interest rate for the most recent valuation was 5.3% which was a 1.0% decrease from the prior
valuation completed in fiscal 2009. Based on review of the underlying assumptions used in the September 1, 2011 Tap
Participation Fee valuation there have not been any material changes to these assumptions and therefore no revaluation of the
Tap Participation Fee is deemed necessary.
Actual new home development in the Company’s service area and actual future tap fees inevitably will vary significantly from the Company’s estimates, which could have a material impact on the Company’s consolidated financial statements. An important component in the Company’s estimate of the value of the Tap Participation Fee, which is based on historical trends, is that the Company reasonably expects water tap fees to continue to increase in the coming years. Tap fees are market based and the continued increase in tap fees reflects, among other things, the increasing costs to acquire and develop new water supplies. Tap fees thus are partially indicative of the increasing value of the Company’s water assets. The Company continues to assess the value of the Tap Participation Fee liability and updates its valuation analysis whenever events or circumstances indicate the assumptions used to estimate the value of the liability have changed materially. The difference between the net present value and the estimated realizable value will be imputed as interest expense using the effective interest method over the estimated development period utilized in the valuation of the Tap Participation Fee.
The $70.7 million balance at May 31, 2013, includes $25.1 million of interest which has been imputed since the acquisition date, recorded using the effective interest method. Payment of the Tap Participation Fee may be accelerated in the event of a merger, reorganization, sale of substantially all assets, or similar transactions and in the event of bankruptcy and insolvency events.
Promissory Notes Payable by HP A&M in Default. 60 of the 80 properties the Company originally acquired from HP A&M are subject to outstanding promissory notes payable to third parties that are secured by deeds of trust on the Company’s properties and water rights, as well as mineral interests. HP A&M has now defaulted on all of the promissory notes and informed the Company that it does not intend to pay any of the amounts owed. HP A&M owed approximately $9.6 million of principal and accrued interest at the time of default. These promissory notes are secured by approximately 14,000 acres of land and 16,882 FLCC shares representing water rights owned by the Company.
On July 2, 2012, the Company formally notified HP A&M that its failure to pay the promissory notes constituted an Event of Default under the Seller Pledge Agreement (as defined below) and a default of a material covenant under the Arkansas River Agreement. The Company informed HP A&M that unless such defaults were cured within thirty days, the Property Management Agreement would be terminated and the Company would proceed to exercise certain rights and remedies under the Arkansas River Agreement, the Seller Pledge Agreement, and the Property Management Agreement to protect its assets. The Company’s remedies at law and under the Arkansas River Agreement and related agreements include, but are not limited to, the right to (i) foreclose on 1,500,000 shares of Pure Cycle common stock issued to HP A&M and the proceeds therefrom (the “Pledged Shares”) which were pledged by HP A&M pursuant to a pledge agreement (the “Seller Pledge Agreement”) to secure the payment and performance by HP A&M of the promissory notes described above; (ii) reduce the Tap Participation Fee; (iii) terminate the Property Management Agreement; and (iv) recover damages caused by the defaults, including certain costs and attorneys’ fees.
On August 3, 2012, the Company formally terminated the Property Management Agreement. On September 27, 2012, the Pledged Shares were sold at auction in a foreclosure sale for $2.35 per share, yielding approximately $3.42 million of proceeds to the Company (net of fees of $110,000). Pursuant to the Arkansas River Agreement, the Company may be entitled to reduce the Tap Participation Fee and recover damages caused by the defaults, including certain costs and attorney’s fees. The Company intends to pursue such remedies over the next 12 months.
To protect its land and water interests, during the nine months ended May 31, 2013, the Company purchased approximately $6.9 million of the $9.6 million notes payable by HP A&M and is negotiating the purchase of the remaining $2.7 million with the holders. HP A&M continues to be liable for making the required payments on the notes, and the Company is pursuing remedies to recover the costs and expenses, including reasonable attorneys’ fees, incurred by the Company in protecting the rights and title to the land and water rights securing the notes payable by HP A&M, including the costs incurred in purchasing the notes defaulted on by HP A&M. The amount owed on the outstanding notes was approximately $6.6 million and $9.6 million at May 31, 2013 and August 31, 2012, respectively.
Operating Lease
Effective December 18, 2012, the Company entered into an operating lease for 1,200 square feet of office space. The lease has a two year term with payments of $1,540 per month. |
Investments in Water, Water Systems, Land and Improvements (Details) (USD $)
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May 31, 2013
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Aug. 31, 2012
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Costs | $ 90,804,300 | $ 90,505,700 |
Accumulated Depreciation and Depletion | (2,218,200) | (1,995,300) |
Net investments in water and water systems | 88,586,111 | 88,510,359 |
Sky Ranch land and improvements, net | 3,770,638 | 3,778,464 |
Investments in water, water systems, land and improvements, net total | 92,356,700 | 92,288,900 |
Arkansas River Valley Assets
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Accumulated Depreciation and Depletion | (1,444,800) | (1,315,900) |
Rangeview Water Supply
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Accumulated Depreciation and Depletion | (7,500) | (7,100) |
Sky Ranch Water Rights And Other Costs
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Accumulated Depreciation and Depletion | (72,600) | (50,800) |
Fairgrounds Water And Water System
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Accumulated Depreciation and Depletion | (600,600) | (534,500) |
Rangeview Water System
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Accumulated Depreciation and Depletion | (71,400) | (67,600) |
Water Supply Other
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Accumulated Depreciation and Depletion | $ (21,300) | $ (19,400) |
Litigation Loss Contingencies (Details Narrative) (Foreclosure Proceedings Commenced)
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May 31, 2013
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Foreclosure Proceedings Commenced
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Number of Real Estate Properties | 37 |
Percent of the Company's Arkansas River Assets Represented by the Properties | 45.00% |
Percentage of FLLC shares | 40.00% |