Annual report pursuant to Section 13 and 15(d)

SHAREHOLDERS' EQUITY

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SHAREHOLDERS' EQUITY
 12 Months Ended
Aug. 31, 2013
Equity [Abstract]  
SHAREHOLDERS' EQUITY
NOTE 8 – SHAREHOLDERS’ EQUITY

Sale of common stock and a common stock upon conversion of Convertible Note – Related Party

The Company issued $5.2 million convertible note on September 28, 2010. The Company’s shareholders authorized conversion of the convertible note  at the January 11, 2011 annual shareholders’ meeting. Following the meeting, the note was converted into 1,982,099 unregistered shares of its common stock. From issuance until conversion, the convertible note accrued interest at rate of 10% per annum. During the fiscal year ended August 31, 2011, the Company accrued $151,700 of interest on the Convertible Note – Related Party.
 

 

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.

Equity Compensation Plan

The Company maintains the 2004 Incentive Plan (the “Equity Plan”), which was approved by shareholders in April 2004. Executives, eligible employees and non-employee directors are eligible to receive options and restricted stock grants pursuant to the Equity Plan. Under the Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices and vesting periods determined by the Compensation Committee of the Board. The Company initially reserved 1.6 million shares of common stock for issuance under the Equity Plan. At August 31, 2013, the Company had 1,218,311 shares that can be granted to eligible participants pursuant to the Equity 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 statement of operations. 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 2012, 29,500 options were forfeited by option holders and an additional 48,000 options expired. No options were forfeited during the fiscal years ended August 31, 2013 and 2011. 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 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 August 2013, the Company granted management options to purchase 100,000 shares of the Company’s common stock pursuant to the Equity Plan. The options vest one-third one year from the date of grant, one-third two years from the date of grant, and one-third three years from date of grant. The options expire ten years from the date of grant. The Company calculated the fair value of these options at $427,100 using the Black-Scholes model with the following variables: weighted average exercise price of $5.88 (which was the closing sales price of the Company’s common stock on the date of the grant); estimated option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest rate of 2.71%; weighted average stock price volatility 63.6%; and an estimated forfeiture rate of 0%. The $427,100 of stock-based compensation is being expensed monthly over the vesting periods.
 

 

In January 2013, the Company granted its non-employee directors options to purchase a combined 32,500 shares of the Company’s common stock pursuant to the Equity Plan. The options vest one year from the date of grant and expire ten years from the date of grant. The Company calculated the fair value of these options at $76,800 using the Black-Scholes model with the following variables: weighted average exercise price of $3.15 (which was the closing sales price of the Company’s common stock on the date of the grant); estimated option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest rate of 1.84%; weighted average stock price volatility 69.2%; and an estimated forfeiture rate of 0%. The $76,800 of stock-based compensation is being expensed monthly over the vesting periods.

In January 2012, the Company granted its non-employee directors options to purchase a combined 12,500 shares of the Company’s common stock pursuant to the Equity Plan.  The options vest one year from the date of grant and expire ten years from the date of grant.  The Company calculated the fair value of these options at $15,400 using the Black-Scholes model with the following variables: weighted average exercise price of $1.85 (which was the closing sales price of the Company’s common stock on the date of the grant); estimated option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest rate of 1.87%; weighted average stock price volatility 73.29%; and an estimated forfeiture rate of 0%. The $15,400 of stock-based compensation is being expensed monthly over the vesting periods.

In January 2011, the Company granted its non-employee directors options to purchase a combined 17,500 shares of the Company’s common stock pursuant to the Equity Plan.  12,500 of the options vest one year from the date of grant and expire ten years from the date of grant.  5,000 of the options vest one-half at the first anniversary of the grant date and one-half at the second anniversary of the grant date.  The Company calculated the fair value of these options at $54,500 using the Black-Scholes model with the following variables: weighted average exercise price of $3.67 (which was the closing sales price of the Company’s common stock on the date of the grant); estimated option lives of ten years; estimated dividend rate of 0%; weighted average risk-free interest rate of 3.37%; weighted average stock price volatility of 84.7%; and an estimated forfeiture rate of 0%. The $54,500 of stock-based compensation is being expensed monthly over the vesting periods.

No options were exercised during the fiscal years ended August 31, 2013, 2012, or 2011.

The following table summarizes the stock option activity for the Equity Plan for the fiscal year ended August 31, 2013:

   
Number of Options
    
Weighted-Average Exercise Price
    
Weighted-Average Remaining Contractual Term
    
Approximate Aggregate Instrinsic Value
  
Oustanding at beginning of period
     215,000     $ 5.88              
Granted
     132,500     $ 5.21              
Exercised
     —     $ —              
Forfeited or expired
     —     $ —              
Outstanding at August 31, 2013
     347,500     $ 5.62     $ 6.98     $ 145,559  
                                 
Options exercisable at August 31, 2013
     215,000     $ 5.90     $ 4.89     $ 121,265  
 

 

The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended August 31, 2013:
 
   
Number of Options
    
Weighted-
Average Grant
Date Fair
Value
  
Non-vested options oustanding at beginning of period
     22,500     $ 1.72  
Granted
     132,500       3.80  
Vested
     (22,500 )     1.72  
Forfeited
     —       —  
Non-vested options outstanding at August 31, 2013
     132,500     $ 3.80  

All non-vested options are expected to vest. The total fair value of options vested during the fiscal years ended August 31, 2013, 2012 and 2011 was $48,700, $66,000 and $74,700, respectively. The weighted average grant date fair value of options granted during the fiscal years ended August 31, 2013, 2012 and 2011 was $3.80, $1.23 and $3.11, respectively.

Share-based compensation expense for the fiscal years ended August 31, 2013, 2012 and 2011, was $66,800, $54,600 and $94,600, respectively.

At August 31, 2013, the Company had unrecognized expenses relating to non-vested options that are expected to vest totaling $453,700. 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, 2013, 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 2013, 2012 or 2011.

Pledged Common Stock Owned by HP A&M

Pursuant to the Arkansas River Agreement, HP A&M pledged, transferred, assigned and granted to the Company a security interest in and to the Pledged Shares, consisting of 1,500,000 shares of Pure Cycle common stock and the proceeds there from.  Due to the HP A&M default the Pledged Shares were sold pursuant to a foreclosure sale for $3.5 million or $2.35 per share.