Pure Cycle Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

12 Months Ended

Aug. 31, 2018

SHAREHOLDERS' EQUITY [Abstract]

SHAREHOLDERS' EQUITY

NOTE 8 – SHAREHOLDERS’ EQUITY

Preferred Stock

The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the Company for $1.00 per share less any dividends previously paid. In the event that the Company’s proceeds from sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Stock holders will receive the next $432,513 of proceeds in the form of a dividend. The terms of the Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid.

Equity Compensation Plan

The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. Awards to purchase 287,000 shares of the Company’s common stock have been made under the 2014 Equity Plan. Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

The Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model (“Black-Scholes model”). Using the Black-Scholes model, the value of the portion of the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income (loss). Option forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company does not expect any forfeiture of its option grants and therefore the compensation expense has not been reduced for estimated forfeitures. During fiscal year 2018, 2,500 options expired. During fiscal year 2017, 15,000 options expired. The Company attributes the value of share-based compensation to expense using the straight-line single option method for all options granted.

The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:

●

The grant date exercise price – is the closing market price of the Company’s common stock on the date of grant;

●

Estimated option lives – based on historical experience with existing option holders;

●

Estimated dividend rates – based on historical and anticipated dividends over the life of the option;

●

Life of the option – based on historical experience, option grants have lives of between 8 and 10 years;

●

Risk-free interest rates – with maturities that approximate the expected life of the options granted;

●

Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the weekly closing price of the Company’s common stock over a period equal to the expected life of the option; and

●

Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.

In fiscal 2018, the Company granted its President and non-employee directors options to purchase 50,000 and a combined 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively. All of the options expire 10 years after the date of grant. The Company calculated the fair value of the options granted during 2018 using the Black-Scholes model.

In fiscal 2017, the Company granted its senior management and non-employee directors options to purchase a combined 110,000 and 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively. All of the options expire 10 years after the date of grant. The Company calculated the fair value of the options granted during 2017 using the Black-Scholes model

In January 2016, the Company granted its non-employee directors options to purchase a combined 36,000 shares of the Company’s common stock pursuant to the 2014 Equity Plan. The Company calculated the fair value of the options granted during 2016 using the Black-Scholes model.

The variable assumptions used in the fair value calculations using the Black-Scholes model are as follows:

	For the Fiscal Years Ended August 31,
	2018			2017			2016
Expected term (years)		5.80			10.00			10.00
Risk-free interest rate		2.41	%		1.84	%		2.06	%
Expected volatility		57.88	%		57.77	%		58.26	%
Expected dividend yield		0	%		0	%		0	%
Weighted average grant-date fair value	$	4.41		$	3.67		$	2.89

During the fiscal year ended August 31, 2018, 10,000 options were exercised. No options were exercised during the fiscal year ended August 31, 2017 or 2016.

The following table summarizes the stock option activity for the combined 2004 Incentive Plan and 2014 Equity Plan for the fiscal year ended August 31, 2018:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Approximate Aggregate Intrinsic Value
Outstanding at August 31, 2016		338,000		$	4.77		—	$	—
Granted		142,500		$	5.47
Exercised		—		$	—
Forfeited or expired		(15,000	)	$	7.88
Outstanding at August 31, 2017		465,500		$	4.88		6.30	$	1,007,740
Granted		82,500		$	8.05
Exercised		(10,000	)	$	7.50
Forfeited or expired		(2,500	)	$	7.50
Outstanding at August 31, 2018		535,500		$	5.31		6.04	$	3,180,990

Options exercisable at August 31, 2018		379,688		$	4.66		4.95	$	2,501,642

The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended August 31, 2018:

	Number of Options			Weighted Average Grant Date Fair Value
Non-vested options outstanding at August 31, 2017		147,500		$	3.64
Granted		82,500			4.41
Vested		(74,167	)		2.84
Forfeited		—			—
Non-vested options outstanding at August 31, 2018		155,833		$	3.76

All non-vested options are expected to vest. The total fair value of options vested during the fiscal years ended August 31, 2018, 2017 and 2016 was $210,700, $90,500, and $216,900, respectively. The weighted average grant date fair value of options granted during the fiscal years ended August 31, 2018, 2017 and 2016 was $4.41, $3.67, and $2.89, respectively.

Share-based compensation expense for the fiscal years ended August 31, 2018, 2017 and 2016, was $324,840, $233,200, and $219,900, respectively.

At August 31, 2018, the Company had unrecognized expenses relating to non-vested options that are expected to vest totaling $294,800. The weighted average period over which these options are expected to vest is less than three years. The Company has not recorded any excess tax benefits to additional paid-in capital.

Warrants

As of August 31, 2018, the Company had outstanding warrants to purchase 92 shares of common stock at an exercise price of $1.80 per share. These warrants expire six months from the earlier of:

(i)

The date all of the Export Water is sold or otherwise disposed of,

(ii)

The date the CAA is terminated with respect to the original holder of the warrant, or

(iii)

The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA.

No warrants were exercised during fiscal 2018, 2017 or 2016.