Annual report pursuant to Section 13 and 15(d)

PARTICIPATING INTERESTS IN EXPORT WATER

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PARTICIPATING INTERESTS IN EXPORT WATER
 12 Months Ended
Aug. 31, 2018
PARTICIPATING INTERESTS IN EXPORT WATER [Abstract]  
PARTICIPATING INTERESTS IN EXPORT WATER
NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER

The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash that the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assets). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.

The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. If the Company does not sell the Export Water, the holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supply liability account), with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.

From time to time, the Company repurchased various portions of the CAA obligations, which retained their original priority. The Company did not make any CAA acquisitions during the fiscal years ended August 31, 2018 or 2017.

The Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty.  Additionally, as a result of the acquisitions, and the consideration from the cumulative sales of Export Water, as detailed in the table below, the remaining potential third-party obligation at August 31, 2018, is approximately $1 million:

   
Export
Water
Proceeds
Received
    
Initial
Export
Water
Proceeds to
Pure Cycle
    
Total
Potential
Third-party
Obligation
    
Participating
Interests
Liability
    
Contingency
  
Original balances
  
$
—
    
$
218,500
    
$
31,807,700
    
$
11,090,600
    
$
20,717,100
  
Activity from inception until August 31, 2015:
                                        
Acquisitions
    
—
      
28,042,500
      
(28,042,500
)
    
(9,790,000
)
    
(18,252,500
)
Relinquishment
    
—
      
2,386,400
      
(2,386,400
)
    
(832,100
)
    
(1,554,300
)
Option payments - Sky Ranch and The Hills at Sky Ranch
    
110,400
      
(42,300
)
    
(68,100
)
    
(23,800
)
    
(44,300
)
Arapahoe County tap fees
    
533,000
      
(373,100
)
    
(159,900
)
    
(55,800
)
    
(104,100
)
Export Water sale payments
    
618,400
      
(489,100
)
    
(129,300
)
    
(44,900
)
    
(84,400
)
Balance at August 31, 2016
    
1,261,800
      
29,742,900
      
1,021,500
      
344,000
      
677,500
  
Fiscal 2017 activity:
    
58,100
      
(51,200
)
    
(6,900
)
    
(2,400
)
    
(4,500
)
Balance at August 31, 2017
    
1,319,900
      
29,691,700
      
1,014,600
      
341,600
      
673,000
  
Fiscal 2018 activity:
                                        
Export Water sale payments
    
60,800
      
(53,600
)
    
(7,200
)
    
(2,500
)
    
(4,700
)
Balance at August 31, 2018
  
$
1,380,700
    
$
29,638,100
    
$
1,007,400
    
$
339,100
    
$
668,300
  

The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority. This means the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. Of the next approximately $6.6 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.8 million of revenue.