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Presentation of Interim Information
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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.
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