Quarterly report pursuant to Section 13 or 15(d)

LONG-TERM OBLIGATIONS AND OPERATING LEASE

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LONG-TERM OBLIGATIONS AND OPERATING LEASE
 6 Months Ended
Feb. 28, 2019
LONG-TERM OBLIGATIONS AND OPERATING LEASE [Abstract]  
LONG-TERM OBLIGATIONS AND OPERATING LEASE
NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular format but is described below.

Participating Interests in Export Water Supply

The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash 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 in Part II, Item 8 of the 2018 Annual Report). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’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 of the Company 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 reacquired various portions of the CAA obligations, which retained their original priority, including the Land Board’s CAA interest which was assigned and relinquished to the Company in 2014. The Company did not make any CAA acquisitions during the three months ended February 28, 2019 and 2018.

As a result of the acquisitions, the Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. The acquisitions and cumulative sales of Export Water are detailed in the table below. The remaining potential third-party obligation at February 28, 2019, 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, 2018:
                                        
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 (1)
    
533,000
      
(373,100
)
    
(159,900
)
    
(55,800
)
    
(104,100
)
Export Water sale payments
    
737,300
      
(593,900
)
    
(143,400
)
    
(49,800
)
    
(93,600
)
Balance at August 31, 2018
    
1,380,700
      
29,638,100
      
1,007,400
      
339,100
      
668,300
  
Fiscal 2019 activity:
                                        
Export Water sale payments
    
138,900
      
(122,400
)
    
(16,500
)
    
(5,800
)
    
(10,700
)
Balance at February 28, 2019
  
$
1,519,600
    
$
29,515,700
    
$
990,900
    
$
333,300
    
$
657,600
  

(1)
The Arapahoe County tap fees are net of $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 that 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 $6.5 million of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive approximately $5.7 million of revenue. Thereafter, the Company will be entitled to all but approximately $220,000 of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

WISE Partnership

In December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”), and the South Metro WISE Authority (“SMWA”). The SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement. The SM IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed, and other infrastructure will be constructed over the next several years.

By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing Agreement (the “WISE Financing Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014. The Company’s cost of funding the Rangeview District’s purchase of its share of existing infrastructure and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $6.8 million over the next five years. See further discussion in Note 6 – Related Party Transactions.

Operating Lease

Effective as of February 2018, the Company entered into an operating lease for approximately 11,393 square feet of office and warehouse space. The lease has a three-year term with payments of $6,600 per month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary base payments. The change in the lease costs is not material to the Company’s operations.