SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Presentation Of Interim Information Policies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Principles of Consolidation |
The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. |
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| 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. Estimates are used to account for certain items such as share-based compensation, deferred tax asset valuation, and the useful lives of assets, etc. Actual results could differ from those estimates. |
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| 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 reputable financial institution. At various times during the fiscal year ended August 31, 2017, the Company’s main operating account exceeded federally insured limits. The Company has never suffered a loss due to such excess balance.
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| Investments |
Management determines the appropriate classification of its investments in certificates of deposit and treasury securities at the time of purchase and reevaluates such determinations each reporting period.
Certificates of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company has $188,000 of investments classified as held-to-maturity at August 31, 2017, which represent certificates of deposit and U.S. treasury notes with maturity dates after August 31, 2018. Securities that the Company does not have the positive intent or ability to hold to maturity, including certificates of deposit, debt securities and any investments in equity securities, are classified as available-for-sale. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value on such securities are recorded as a component of Accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method. The Company’s certificates of deposit and treasury securities mature at various dates through July 2018. |
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| Concentration of Credit Risk and Fair Value |
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, certificates of deposit 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 instrument for which it is practicable to estimate that value.
Cash and Cash Equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value.
Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts.
Investments – The carrying amounts of investments approximate fair value. Investments are described further in Note 3 – Fair Value Measurements.
Accounts Payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.
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 – Water and Land Assets). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined in Note 4 – Water and Land Assets). Because of the uncertainty of the sale of Export Water, the Company has determined that the recorded balance of the CAA does not have a determinable fair value. The CAA is described further in Note 5 – Participating Interests in Export Water.
Notes Receivable – Related Parties – The market value of the notes receivable – related parties: Rangeview Metropolitan District (the “Rangeview District”) and Sky Ranch Metropolitan District No. 5 are not practical to estimate due to the related party nature of the underlying transactions.
Off-Balance Sheet Instruments – The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. See further discussion in Note 5 – Participating Interests in Export Water. |
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| Cash Flows |
The Company did not have any debt during the fiscal years ended August 31, 2017 and 2016, and therefore did not pay any interest during the fiscal years ended August 31, 2017 and 2016. The Company paid $441,400 in interest during the fiscal year ended August 31, 2015.
The Company did not pay any income taxes during the fiscal year ended August 31, 2017. In the fiscal year ended August 31, 2016, the Company paid $292,700 for alternative minimum tax the Company owed as a result of the sale of the Company’s farm assets. The Company did not pay any income taxes during the fiscal year ended August 31, 2015.
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| Trade Accounts Receivable |
The Company records accounts receivable net of allowances for uncollectible accounts. Excluded from trade accounts receivable are balances due from discontinued operations. The Company has not recorded an allowance for uncollectible accounts in receivables from continuing operations for either of the periods ended August 31, 2017 or 2016. The allowance for uncollectible accounts was determined based on specific review of all past due accounts.
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| 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.
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| 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 30 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.
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| Tap Participation Fee Liability and Imputed Interest Expense |
Pursuant to the Asset Purchase Agreement dated May 10, 2006 (the "Arkansas River Agreement") between the Company and HP A&M, the Company was 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 (the "Tap Participation Fee" or "TPF"). The Tap Participation Fee was due and payable once the Company had sold a water tap and received the consideration due for such water tap. In 2015, the Company settled its claims against HP A&M relating to certain defaults. As a result of the settlement, the TPF liability was eliminated resulting in an increase in equity of approximately $3.3 million. |
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| Revenue Recognition |
The Company generates revenues through one line of business. Its revenues are derived through its wholesale water and wastewater business, which is described below.
The Company generates revenues through its wholesale water and wastewater business predominately from three sources: (i) monthly wholesale water usage fees and wastewater service fees, (ii) one-time water and wastewater tap fees and construction fees, and (iii) consulting fees. Because these items are separately delivered, the Company accounts for each of the items separately, as described below.
i) Monthly wholesale water and wastewater 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. Revenues recognized by the Company from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the Lowry Range are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). Revenues recognized by the Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District. See further description of “Export Water,” the “Lowry Range,” and the “Rangeview Water Supply” in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System.”
The Company recognizes wastewater processing revenues monthly based on a flat monthly fee and actual usage charges. The monthly wastewater service fees are shown net of amounts retained by the Rangeview District. Amounts recognized for water and wastewater services during the fiscal years ended August 31, 2017, 2016 and 2015 are presented in the statements of comprehensive loss. Costs of delivering water and providing wastewater service to customers are recognized as incurred.
The Company delivered 94.6 million, 33.9 million and 97.5 million gallons of water to customers during the fiscal years ended August 31, 2017, 2016 and 2015, respectively.
ii) Water and wastewater tap fees 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 and constructing facilities to deliver water. Construction fees are fees used by the Company to construct assets that are typically required to be constructed by developers or home builders and are separate from tap fees.
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 30 years. Costs of construction of the assets when the Company will own the assets are capitalized and depreciated over their estimated economic lives.
From time to time, the Company enters into water service agreements to provide water service to customers. The Company owns the facilities which store, treat, and deliver the water and amortizes the cost of these facilities over their useful lives. The Company recognized $217,500 of tap fee revenue for the year ended August 31, 2017 and $14,300 of tap fee revenue in each of the two fiscal years ended August 31, 2016, and 2015. The Company recognized $41,500 of “Special Facilities” funding as revenue in each of the three fiscal years ended August 31, 2017, 2016, and 2015. As of August 31, 2017, the Company has deferred recognition of $1.1 million of tap and construction revenue from customer agreements, which will be recognized as revenue ratably through 2036.
iii) Consulting fees – Consulting fees are fees the Company receives, typically on a monthly basis, from municipalities and area water providers along the I-70 corridor, for contract operations services. The Company recognizes consulting fees monthly, based on a flat monthly fee plus charges for additional work performed.
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| Royalty and other obligations |
Revenues from the sale of Export Water are shown gross 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 Rangeview District.
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| Oil and Gas Lease Payments |
As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a three-year 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”), which subsequently sold the O&G Lease to a wholly-owned subsidiary of ConocoPhillips Company, 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 received a payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which was recognized as income on a straight-line basis over two years (the extension term of the O&G Lease). In addition, during the fiscal year ended August 31, 2015, the Company received an up-front payment of $72,000, for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Rangeview Lease”). The Company recognizes the up-front payments on a straight-line basis over the terms of the respective leases. During the fiscal years ended August 31, 2017, 2016 and 2015, the Company recognized $19,000, $360,800, and $645,700, respectively, of income related to the up-front payments received pursuant to these leases.
As of August 31, 2017, the Company recognized the remaining $19,000 of income related to the Rangeview Lease. Subsequent to August 31, 2017, the Company entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP, for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Bison Lease”). Pursuant to the Bison Lease, on September 20, 2017, the Company received an up-front payment of $167,200, which will be recognized as income on a straight-line basis over three years (the term of the Bison Lease).
During the three months ended February 28, 2015, two wells were drilled within the Company’s mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to the Company. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. During the fiscal years ended August 31, 2017, 2016 and 2015, the Company received $186,600, $343,600 and $412,600, respectively, in royalties attributable to these two wells. The Company classifies income from lease and royalty payments as Other income in the statement of comprehensive loss as the Company does not consider these arrangements to be an operating business activity. |
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| 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, 2016 and 2015 had no impact on the income tax provisions.
The Company recognized $233,200, $219,900, and $240,000 of share-based compensation expenses during the fiscal years ended August 31, 2017, 2016 and 2015, respectively.
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| 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, 2017.
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 2013 through fiscal 2016. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 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, 2017, 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, 2017, 2016 or 2015.
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| Discontinued Operations |
In August 2015, the Company sold approximately 14,600 acres of irrigated farm land and related Arkansas River water rights for proceeds of approximately $44.7 million, which were substantially all of the assets comprising the Company’s agricultural segment. Pursuant to the terms of the purchase and sale agreement, the Company continued to manage and receive the lease income until December 31, 2015. As a consequence of the sale, the operating results and the assets and liabilities of the discontinued operations, which formerly comprised the agricultural segment, are presented separately in the Company’s financial statements. Summarized financial information for the discontinued agricultural business is shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued operation.
The Company anticipates continued expenses through the end of calendar 2018 related to the discontinued operations. The Company will continue to incur expenses related to the remaining agricultural land the Company continues to own and for the purpose of collecting outstanding receivables.
The individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued operations” and “Liabilities of discontinued operations” in the consolidated balance sheets. The carrying amounts of the major classes of assets and liabilities included part of the discontinued business are presented in the following table:
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| 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 465,600, 338,100, and 312,100 common share equivalents as of August 31, 2017, 2016 and 2015, respectively, have been excluded from the calculation of loss per common share as their effect is anti-dilutive. |
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| 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 financial statements and ensure that there are proper controls in place to ascertain that the Company’s financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, (Topic 606) that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. The Company is continuing to study the impacts of this standard and its amendments, including impacts on tap fee and other up-front revenue payments and how impacts if any will be initially reflected at the adoption date. The Company does not expect that revenue recognition from on-going water sale and delivery fees and waste water disposal fees, or consulting service contracts, will be significantly affected but these matters are continuing to be assessed. It also requires additional disclosures. The new standard is effective for annual reporting periods beginning after December 31, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 describes how an entity’s management should assess, considering both quantitative and qualitative factors, whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued, which represents a change from the existing literature that requires consideration about an entity’s ability to continue as a going concern within one year after the balance sheet date. The standard is effective for the Company on September 1, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the presentation and disclosure requirements for discontinued operations. The update was adopted by the Company in fiscal year 2016. |
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