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Note 2 - Summary Of Significant Accounting Policies
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12 Months Ended |
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Aug. 31, 2012
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| Significant Accounting Policies [Text Block] |
NOTE
2: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid debt
instruments with original maturities of three months or less.
The Company’s cash equivalents are comprised entirely
of money market funds maintained at a high quality financial
institution in an account which as of August 31, 2012, did
not exceed federally insured limits. At various
times during the year ended August 31, 2012, 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. At various times throughout the year ended
August 31, 2012, cash deposits have exceeded federally
insured limits. The Company invests its idle cash primarily
in certificates of deposit, money market instruments,
commercial paper obligations, corporate bonds and US
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 relatively short maturity of
these instruments.
The
amount reported on the balance sheets for marketable
securities represents the fair value of the underlying
instruments as reported by the financial institutions where
the funds are held as of August 31, 2012 and
2011. The Company has recorded net unrealized
losses on its marketable securities of $1,100 and $2,900 at
August 31, 2012 and August 31, 2011,
respectively. The Company did not realize any
gains or losses on its marketable securities during each of
the three years ended August 31, 2012, 2011 and 2010.
Notes
Receivable and Construction Proceeds Receivable
The
amounts reported on the balance sheet for the Company’s
notes receivable and construction proceeds receivable
approximate their fair values as they bear interest at rates
which are comparable to current market rates.
Long-term
Financial Liabilities
The
Comprehensive Amendment Agreement No. 1 the “CAA”
is comprised of a recorded balance and an off-balance sheet
or “contingent” obligation associated with the
Company’s acquisition of its “Rangeview Water
Supply” (defined in Note 4 below). The
amount payable is a fixed amount but is repayable only upon
the sale of “Export Water” (defined in Note 4
below). 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 CAA is described further in Note
5 – Participating
Interests in Export Water.
The
recorded balance of the “Tap Participation Fee”
liability (as described 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
Payables and Related Party Accounts Receivable
In
conjunction with HP A&M defaulting on certain
promissory notes, the Company has the right to collect from
HP A&M any amounts the Company spends to cure the
defaulted notes. Accordingly the Company has
recorded the entire amount of the HP A&M notes as a
receivable from HP A&M. The total receivable
from HP A&M is $9.6 million with $4.6 million as
current and $5.0 million as long term. 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 which the Company will pursue
remedies under the Asset Purchase Agreement (the "Arkansas
River Agreement" described in more detail in Note
4) over the next 12 months.
Subsequent
to fiscal 2012, the Company began acquiring the defaulted
and non-defaulted promissory notes that are payable by HP
A&M. The majority of the notes issued
by the Company 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.
Cash
Flows
The
Company did not pay any interest or income taxes during the
fiscal years ended August 31, 2012, 2011 and 2010,
respectively.
Marketable
Securities
At
August 31, 2012, the Company’s marketable securities
are comprised entirely of certificates of deposit maintained
at various financial institutions, each of which have
invested balances below federally insured limits and pay
interest at stated rates through maturity. The
certificates mature at various dates through May 2013;
however, these securities represent temporary investments and
it is management’s intent to hold these securities
available for current operations and not hold them until
maturity, therefore they are classified as available-for-sale
securities and are recorded at fair value. The
Company has no investments in equity instruments.
The
Company’s marketable securities are recorded as
available-for-sale and therefore any unrecognized changes in
the fair value of these marketable securities is included as
a component of accumulated comprehensive income
(loss).
Accounts
Receivable
The
Company records accounts receivable net of allowances for
uncollectible accounts. The Company recorded
$20,400 and $0 as of August 31, 2012 and 2011 respectively
for allowances for uncollectible accounts. The allowance for
uncollectible accounts was determined based on specific
review of all past due accounts. The
August 31, 2012 allowance for uncollectible accounts is
entirely due to the assumed farm accounts receivable (see
Note 7) from HP A&M.
Long-Lived
Assets
The
Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected
to be generated by the eventual use of the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Based on
the Company’s procedures the Company believes there
are impairments to its “Paradise Water Supply”
asset (defined in Note 4 below) and land and water rights
held for sale related to the Arkansas River
Assets. There was no impairment in the carrying
amounts of the remaining long-lived assets at August 31,
2012 and 2011. See further discussion in Note 4
below under sections “Paradise Water Supply”
and “Arkansas River Assets”.
Capitalized
Costs of Water and Wastewater Systems and Depreciation and
Depletion Charges
Costs
to construct water and wastewater systems that meet the
Company’s capitalization criteria are capitalized as
incurred, including interest, and depreciated on a
straight-line basis over their estimated useful lives of up
to 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 water assets that are being utilized on
the basis of units produced (i.e. thousands of gallons sold)
divided by the total volume of water adjudicated in the water
decrees.
Tap
Participation Fee Liability and Imputed Interest
Expense
The
Tap Participation Fee liability, as described in
Note 7 – Long Term Debt
and Operating Lease, represents the discounted fair
value of the amounts the Company estimates it will pay HP
A&M pursuant to the asset purchase agreement (the
“Arkansas River Agreement”) described in more
detail in Note 4. The Company imputes interest
expense on the unpaid Tap Participation Fee using the
effective interest method over the estimated development
period utilized in the valuation of the liability. The
Company imputed interest of $3.5 million, $3.8 million and
$3.6 million during the years ended August 31, 2012, 2011 and
2010, respectively.
The
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
years ended August 31, 2012, 2011 or 2010. As of
August 31, 2012, 19,427 water taps remain subject to the Tap
Participation Fee.
Revenue
Recognition
The
Company generates revenues mainly from (i) one time water and
wastewater tap fees, (ii) construction fees, and
(iii) monthly wholesale water usage fees and wastewater
service fees. Because these items are separately
delivered, the Company accounts for each of the items
separately, as described below.
Tap
and Construction Fees
Tap
fees, also called system development fees, are received in
advance, are non-refundable and are typically used to fund
construction of certain facilities and defray the acquisition
costs of obtaining water rights.
Construction
fees are fees used by the Company to construct assets that
are typically required to be constructed by developers or
home builders.
Proceeds
from tap fees and construction fees are deferred upon receipt
and recognized in income either upon completion of
construction of infrastructure or ratably over time,
depending on whether the Company owns the infrastructure
constructed with the proceeds or a customer owns the
infrastructure constructed with the proceeds.
Tap
and construction fees derived from agreements in which the
Company will not own the assets constructed with the fees are
recognized as revenue using the percentage-of-completion
method. Costs of construction of the assets when
the Company will not own the assets are recorded as
construction costs.
Tap
and construction fees derived from agreements for which the
Company will own the infrastructure are recognized as
revenues ratably over the estimated accounting service life
of the facilities constructed, starting at completion of
construction, which could be in excess of thirty
years. Costs of construction of the assets when
the Company will own the assets are capitalized and
depreciated over their estimated economic lives.
In
August 2005, the Company entered into the Water Service
Agreement (the “County Agreement”) with Arapahoe
County (the “County”) to provide water service to
the County’s fairgrounds (the
“Fairgrounds”). Pursuant to the County
Agreement, the Company sold the County 38.5 water taps for
consideration of $567,490. In July 2006, upon
completion of the construction of the “Wholesale
Facilities” (which were paid for with the water tap fee
proceeds), the Company began ratably recognizing $428,000 of
water tap fees into income. The $428,000 is the
net of the water tap fees received by the Company of
$567,490, decreased by (i) royalties to the Colorado State
Board of Land Commissioners (the “Land Board”
which owns the “Lowry Range”) of $34,522; and
(ii) 65% of the total payments made to external CAA holders
or $104,136. In each of the three fiscal years
ended August 31, 2012, 2011 and 2010, the Company recognized
$14,300 of tap fee revenue. At August 31, 2012,
$341,900 of these tap fees are still deferred.
The
Company recognized $41,500 of “Special
Facilities” funding as revenue in each of the three
fiscal years ended August 31, 2012 and 2011 respectively.
These construction revenues also relate to the County
Agreement entered into in August 2005.
As
of August 31, 2012, the Company has deferred recognition of
$1.3 million of tap and construction fee revenue from the
County, which will be recognized as revenue ratably through
2036.
In
addition to the tap fee revenues and the construction
revenues, the Company also records interest income from the
County using the effective interest
method. Pursuant to the County Agreement, the
County is making payments to the Company totaling $82,200 per
year for the construction of the Special Facilities at the
Fairgrounds. These payments will continue through
2015 and include interest at 6% per annum. The
Company recognized $19,200, $22,900 and $26,300 of interest
income from the County during the fiscal years ended August
31, 2012, 2011 and 2010, respectively.
In
August 2012, the Company entered into an agreement with Front
Range Pipeline which grants Front Range Pipeline easement
rights for a period of three years to construct a pipeline
for total consideration of $28,700. As of August
31, 2012, the Company had $28,500 in deferred revenue from
Front Range Pipeline.
Monthly
Wholesale Usage and Service Fees
Monthly
wholesale water usage charges are assessed to the
Company’s customers based on actual metered usage each
month plus a base monthly service fee assessed per single
family equivalent (“SFE”) unit
served. One SFE is a customer, whether
residential, commercial or industrial, that imparts a demand
on the Company’s water or wastewater systems similar to
the demand of a family of four persons living in a single
family house on a standard sized lot. One SFE is
assumed to have a water demand of approximately 0.4 acre feet
per year and to contribute wastewater flows of approximately
300 gallons per day. Water usage pricing uses a
tiered pricing structure. The Company recognizes
wholesale water usage revenues upon delivering water to its
customers or its governmental customers’ end-use
customers, as applicable. The water revenues
recognized by the Company are shown net of royalties to the
Land Board and, when applicable, amounts retained by the
Rangeview Metropolitan District (the
“District”).
The
Company recognizes wastewater processing revenues monthly
based on usage. The monthly wastewater service fees are shown
net of amounts retained by the District.
Amounts
recognized for water and wastewater services during the
fiscal years ended August 31, 2012, 2011 and 2010, are
presented in the statements of operations.
Costs
of delivering water and providing wastewater service to
customers are recognized as incurred.
The
Company delivered 34.2 million, 34.5 million and 33.1 million
gallons of water to customers during the fiscal years ended
August 31, 2012, 2011 and 2010, respectively.
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” are shown net of the royalties
to the Land Board and the amounts retained by the
District. See further description of the
“Lowry Range” in Note 4 – Water
Assets under section “Rangeview Water Supply and
Water System”.
Oil
and Gas Lease Payments
As further described in Note 4
below, on March 10, 2011, the Company entered into a
Paid-Up Oil and Gas Lease (the “O&G Lease”)
and a Surface Use and Damage Agreement (the “Surface
Use Agreement”) with Anadarko E&P Company, L.P.
(“Anadarko”) a wholly owned subsidiary of
Anadarko Petroleum Company. Pursuant to the
O&G Lease on March 10, 2011, the Company received an
up-front payment of $1,243,400 from Anadarko for the purpose
of exploring for, developing, producing and marketing oil and
gas on approximately 634 acres of mineral estate owned by the
Company at its Sky Ranch property. The Company
began recognizing the up-front payment from Anadarko as
income on a straight-line basis over three years (the initial
term of the O&G Lease) on March 10,
2011. During the years ended August 31, 2012 and
2011, the Company recognized $423,000 and $199,000
respectively, of income related to the up-front payments
received pursuant to the O&G Lease.
As
of August 31, 2012, the Company has deferred recognition of
$639,000 of income related to the O&G Lease, which will
be recognized into income ratably through February
2014.
Share-based
Compensation
The
Company maintains a stock option plan for the benefit of its
employees and directors. The Company records
share-based compensation costs which are measured at the
grant date based on the fair value of the award and are
recognized as expense over the applicable vesting period of
the stock award using the straight-line
method. The Company has adopted the alternative
transition method for calculating the tax effects of
share-based compensation which allows for a simplified method
of calculating the tax effects of employee share-based
compensation. Because the Company has a full
valuation allowance on its deferred tax assets, the granting
and exercise of stock options during the fiscal years ended
August 31, 2012 and 2011 had no impact on the income tax
provisions.
The
Company recognized $54,600, $94,600 and $87,600 of
share-based compensation expenses during the fiscal years
ended August 31, 2012, 2011 and 2010, respectively.
Income
Taxes
The
Company uses a “more-likely-than-not” threshold
for the recognition and de-recognition of tax positions,
including any potential interest and penalties relating to
tax positions taken by the Company. The Company
does not have any significant unrecognized tax benefits as of
August 31, 2012.
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 2009 through fiscal 2011.
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 August 31, 2012, the
Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any
interest expense recognized during the fiscal years ended
August 31, 2012, 2011 or 2010.
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
215,100, 280,100 and 262,600 common share equivalents as of
August 31, 2012, 2011 and 2010, respectively, have been
excluded from the calculation of loss per common share as
their effect is anti-dilutive.
Recently
Issued Accounting Pronouncements
The
Company continually assesses any new accounting
pronouncements to determine their
applicability. Where 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 financial
statements and assures that there are proper controls in
place to ascertain that the Company’s financials
properly reflect the change. A variety of proposed
or otherwise potential accounting standards are currently
under study by standard-setting organizations and various
regulatory agencies. Because of the tentative and preliminary
nature of these proposed standards, the Company has not
determined whether implementation of such proposed standards
would be material to the Company’s financial
statements. New pronouncements assessed by the
Company recently are discussed below:
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 and interim
periods beginning after December 15, 2011 (September 1, 2012
for the Company). The Company does not expect the
adoption of ASU 2011-04 to have a material impact on its
results of operations, financial condition, or cash
flows.
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