PURE CYCLE CORPORATION Overview
The discussion and analysis below includes certain forward-looking statements
that are subject to risks, uncertainties and other factors, as described in
"Risk Factors" and elsewhere in this Annual Report on Form 10-K, that could
cause our actual growth, results of operations, performance, financial position
and business prospects and opportunities for this fiscal year and the periods
that follow to differ materially from those expressed in, or implied by, those
forward-looking statements. Readers are cautioned that forward-looking
statements contained in this Annual Report on Form 10-K should be read in
conjunction with our disclosure under the heading "FORWARD-LOOKING STATEMENTS"
on page 1.
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the results of operations and our financial condition and
should be read in conjunction with the accompanying consolidated financial
statements and the notes thereto included in Part II, Item 8 of this Annual
Report on Form 10-K. The following sections focus on the key indicators reviewed
by management in evaluating our financial condition and operating performance,
including the following:
• Revenues generated from providing water and wastewater services;
• Revenues from water and wastewater tap sales;
• Revenues from lot sales at
• Expenses associated with developing our water and land assets;
• Expenses associated with developing lots at
• Cash available to continue development of our land, water rights and service
agreements
Our MD&A section includes the following items:
Executive Summary - a summary of important financial metrics in fiscal 2020;
Our Business - a general description of our business, our services, and our business strategy;
Critical Accounting Policies and Use of Estimates - a discussion of our critical accounting policies that require critical judgments, assumptions, and estimates;
Results of Operations - an analysis of our results of operations for the three fiscal years presented in our accompanying consolidated financial statements; and
Liquidity, Capital Resources and Financial Position - an analysis of our cash position and cash flows, as well as a discussion of our financial obligations.
Executive Summary
Fiscal 2020 was highlighted by the substantial completion of the initial phase
of our
• Total revenue increased to
increase compared to fiscal 2019) primarily due to lot sales and water and
wastewater tap fees at
• Net income increased to
increase compared to fiscal 2019), primarily due to lot sales, partial
satisfaction of the contingency related to public improvement reimbursables,
and water and wastewater tap fees at
• Fully diluted earnings per common share for fiscal 2020 was
for fiscal 2019
• Total assets increased to
or 7.2% increase compared to 2019), primarily due to increased cash from
payments for lots and water, and wastewater taps at
million expense reimbursement from the Sky Ranch CAB through bond proceeds of
which
balance sheet and
of construction costs - related party on the consolidated statements of
operations and comprehensive income and increased Investments in water and
wastewater systems on the consolidated balance sheet; and
• Total equity increased to
or 9.8% increase compared to 2019), primarily due to net income for fiscal 2020
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In fiscal 2020, total revenues were $25.9 million , primarily consisting of $18.9
million of lot sales recognized under the percentage-of-completion method as
well as a point in time for one home builder customer, and a combined $5.6
million from the sale of 201 and 189 water and wastewater taps. The number of
wastewater taps sold are less than the number of water taps sold because we do
not sell wastewater taps at Wild Pointe. Wild Pointe customers are on septic
systems. Comparatively, in fiscal 2019, total revenues were $20.4 million ,
primarily from $12.0 million of recognized lot sales and $3.5 million from the
sale of 119 and 113 water and wastewater taps. Other income increased in fiscal
2020 mainly due to the $6.3 million of reimbursables we received from the Sky
Ranch CAB for partial reimbursement of public improvement costs we funded at Sky
Ranch . In total, we received $10.5 million from the Sky Ranch CAB for partial
reimbursement of public improvement costs we funded, the remaining $4.2 million
reduced Land development inventories on our consolidated balance sheet. Due to
the strong performance of our land development segment, which produced the lot
sales and lead to the increase in water and wastewater taps sales, along with
the recognition of the $6.3 million of other income from receipt of the
reimbursables, net income increased to $6.8 million for fiscal 2020 compared to
$4.8 million for fiscal 2019, for an increase of 40%.
Our Business
We are a diversified land and water resource development company. At our core we are an innovative and vertically integrated wholesale water and wastewater service provider that, in addition to owning and developing wholesale water and wastewater resources, develops a master planned community on land we own and to which we provide water and wastewater services. We have accumulated valuable water and land interests over the past 30 years and have developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region. Our primary land asset,Sky Ranch , is located in one of the most active development areas in the Denver metropolitan region along theI-70 corridor, and we are developing lots atSky Ranch for residential, commercial, retail, and light industrial uses.
Although we report our results of operations in two segments, our water and wastewater service segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable and value added business enterprise.
Water and Wastewater
Water resources throughout the westernUnited States and more prominently inColorado are a scarce and valuable resource. We own or control a portfolio of 29,500 acre-feet of groundwater and surface water supplies, 26,000 acre-feet of adjudicated reservoir sites, wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are located in southeast Denver, inArapahoe County , an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater, which we believe provides us with a unique competitive advantage in offering these services. We provide wholesale water and wastewater service to local governments, including theRangeview District ,Arapahoe County , the Sky Ranch CAB, andElbert 86 District. Our mission is to provide sustainable, reliable, high quality water to our customers and collect and treat wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we seek to demonstrate good stewardship over our valuable water rights in the water-scarceDenver, Colorado region. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities. We also design, permit, construct, operate and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to theColorado Department of Public Health and Environment .
Our water and wastewater service segment generates revenue from the following sources, described in greater detail in Item 1 - Business above:
• Monthly water usage and wastewater treatment fees;
• One-time water and wastewater tap (connection) fees;
• Construction and Special Facility funding fees;
• Consulting fees; and
• Industrial - oil and gas operation fees
In 2017, we launched our land development segment. We are actively developing theSky Ranch Master Planned Community located along theI-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space just four miles south of DIA. Our land development activities include the design, permitting, and construction of all of the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails and other infrastructure to deliver "ready to build" finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots as well as reimbursements for the construction of public improvements, such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which come from the local governmental entity, the Sky Ranch CAB, subject to the approval and issuance of municipal bonds to fund such reimbursements. 33 -------------------------------------------------------------------------------- Table of Contents Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces and other investments efficiently, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments. InJune 2017 , we entered into separate contracts with three national home builders (Richmond American Homes ,Taylor Morrison , and KB Home), pursuant to which we agreed to sell 506 total single-family, detached residential lots at the Sky Ranch property. We are obligated, pursuant to these contracts, to construct infrastructure and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and sanitary sewer mains and stubs, storm water management facilities, and lot grading improvements for delivery of finished lots to each builder. We were also required to cause theRangeview District to install and construct wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property. As ofAugust 31, 2020 , we have substantially completed all of the wholesale infrastructure improvements for the initial residential lots, which included the completion of a wastewater reclamation facility that can serve approximately 2,000 SFE's inSky Ranch before expansion. Pursuant to various agreements, we provide financing to theRangeview District and the Sky Ranch Districts (through the Sky Ranch CAB) as described in Note 14 -Related Party Transactions to the accompanying consolidated financial statements for the majority of the improvements at Sky Ranch. In conjunction with approvals fromArapahoe County for the Sky Ranch project, we, together with theRangeview District and/or Sky Ranch Districts and/or the Sky Ranch CAB, are obligated to maintain a deposit account withArapahoe County to ensure completion of certain public infrastructure improvements and to warranty the improvements for a one-year period following completion and delivery. As ofAugust 31, 2020 ,$1.0 million remains on deposit, with the warranty period set to expire inOctober 2021 . As ofAugust 31, 2020 , we have expended$33.5 million related to the development of the first filing of Sky Ranch out of the total estimated$35.8 million . We anticipate the remaining$2.3 million will be spent during our fiscal 2021. These amounts include estimated reimbursable costs of$29.0 million , for which we received a partial reimbursement of$10.5 million inNovember 2019 . We believe the remaining$18.5 million remaining reimbursables from the Sky Ranch CAB will be paid from future municipal bonds as the project continues to grow its assessed value and tax base. As ofAugust 31, 2020 , lot sales to home builders generated$35.1 million in cash payments, with the remaining$1.6 million paid inNovember 2020 , which combined represents the full$36.7 million sales price contracted for with the home builders. In addition, as ofAugust 31, 2020 , the Sky Ranch development produced$8.9 million of water and wastewater tap fees, and we expect that an additional$5.9 million of tap fees will be received during our fiscal 2021. InDecember 2020 , we expect to begin construction on the second filing at Sky Ranch, which is expected to include nearly 900 residential lots. Subsequent toAugust 31, 2020 , we entered into separate agreements with four home builders (KB Home, Meritage Homes,DR Horton and Challenger Homes ) pursuant to which we agreed to sell 789 single-family attached and detached residential lots at the Sky Ranch property. Due to our strong performance in phase one of the Sky Ranch project, we were able to realize a 30% increase in our lot price from$75,000 for a 50' lot in phase one to$97,000 for the same 50' lot in phase two. This next filing at Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases. The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment of water assets and other long-lived assets, fair value estimates and share-based compensation. Below is a summary of these critical accounting policies.
Revenue Recognition
Revenues derived from our water and wastewater services consist mainly of
monthly metered wholesale water usage and wastewater treatment fees, tap fees,
construction fees/special facility funding, and consulting fees. Revenues
derived from land development activities consist mainly of lot sales and project
management service fees. Revenue is recognized from our water and wastewater
segment and land development segment as described below and further described in
Note 2 - Summary of Significant Accounting Policies to the accompanying
consolidated financial statements.
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Water and Wastewater Revenue
Monthly wholesale water charges are assessed to our customers based on actual
metered usage each month plus a base monthly service fee assessed per SFE unit
served. One SFE is a customer, whether residential, commercial or industrial,
that imparts a demand on our water or wastewater systems are computed based on
the demand of a single-family detached home of four persons living on a
standard-sized 5,500 square foot lot. Water consumption pricing uses a tiered
pricing structure where the cost of water increases as customers use more water.
We recognize wholesale water usage revenues at a point in time upon delivering
water to our customers or our governmental customers' end-use customers, as
applicable. Revenues recognized by us from the sale of Export Water and other
portions of our "Rangeview Water Supply" off the Lowry Range are shown gross of
royalties to the Land Board. Revenues recognized by us 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 .
In addition, we provide water for hydraulic fracturing to industrial customers
in the oil and gas industry who are located in and adjacent to our service
areas. Oil and gas operations revenues are recognized at a point in time upon
delivering water to a customer, unless other special arrangements are made.
We recognize wastewater treatment revenues monthly based on a fixed flat monthly
fee and actual monthly usage charges. The monthly wastewater treatment fees are
shown net of amounts retained by the Rangeview District . Costs of delivering
water and providing wastewater services to customers are recognized as incurred.
A tap constitutes a right to connect to the wholesale water and wastewater
systems through a service line to a residential or commercial building or
property, and once granted, the customer may make a physical tap into the
wholesale line(s) to connect its property for water and/or wastewater service.
The right stays with the property. We have no obligation to physically connect
the property to the lines. Once connected to the water and/or wastewater
systems, the customer has live service to receive metered water deliveries from
our system and send wastewater into our system. We recognize water and
wastewater tap fees as revenue at the time we grant a right for the customer to
tap into the water or wastewater service line to obtain service.
We recognize construction fees, including fees received to construct special facilities, over time as the construction is completed.
Consulting fees are fees we receive, typically monthly. We earn these fees from municipalities and area water providers along theI-70 corridor for which the Company provides contract operations services. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed, if applicable. Land Development Revenue Revenues derived from lot sales depend on the terms of the agreement with the builder. Lots are completed and sold pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a fully finished lot, whereby the purchaser pays for a ready-to-build finished lot and the sales price is paid in a lump-sum amount upon completion of the finished lot that is building permit ready. We recognize revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete, and we have no further obligations for the lot. Our second format is the sale of finished lots pursuant to a lot development agreement with builders, whereby we receive payments in stages. Because the builder (i.e., the customer) takes ownership and control of the lot at the first closing and subsequent improvements made by us improve the builder's lot as construction progresses, we account for revenue over time with progress measured based upon costs incurred to date compared to total expected costs (percent complete methodology). Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset and amounts received in excess of revenue recognized are recorded as deferred revenue. We do not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot. We adopted the practical expedient for financing components and do not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year of when we begin construction on those lots. The Sky Ranch CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping and parks, the costs of which may qualify as reimbursable costs. Pursuant to our agreements with the Sky Ranch CAB (see Note 14 - Related Party Transactions to the accompanying consolidated financial statements), we are obligated to finance this infrastructure, which we have substantially completed for the initial filing. These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the Sky Ranch CAB,Rangeview District , or other governmental entities, and after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain. Because these public improvements are owned and operated on behalf of a governmental entity, they may qualify for reimbursement. 35 -------------------------------------------------------------------------------- Table of Contents Pursuant to our agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to us for any advances made or expenses incurred by us related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, when we receive the reimbursement, we record the amount received as Other income to the extent that costs have previously been expensed and reduce Land development inventories by any remaining reimbursables received. We submit specific costs for reimbursement to the Sky Ranch CAB. If reimbursable costs received exceed actual expenses we incurred for the cost of the public improvements, they are recorded as Other income as received. All amounts owed pursuant to agreements with the Sky Ranch Districts or the Sky Ranch CAB bear interest at a rate of 6% per annum. Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income accrues but is not recognized by the Sky Ranch CAB until the bonds are issued. As ofAugust 31, 2020 , we have deferred recognition of$1.2 million in interest due on these amounts. OnMay 2, 2018 , we entered into two Service Agreements for Project Management Services (the "Project Management Agreements") with the Sky Ranch CAB. Pursuant to the Project Management Agreements, we act as the project manager and provide any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance, planning design and approvals, project administration, contractor agreements, and construction management and administration. We must submit to the Sky Ranch CAB a monthly invoice, in a form acceptable to the Sky Ranch CAB, detailing all project management activities during the period. We are responsible for all expenses we incur in the performance of the Project Management Agreements and are not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Sky Ranch CAB is subject to annual budget and appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation. We receive a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible improvements. The project management fees owed to us qualify as a reimbursable cost. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse us for all or a portion of advances provided or expenses incurred for reimbursables. Due to this contingency, the project management fees have been deferred and won't be recognized as revenue until the bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for the public improvements. At that point, the portion of the project management fees repaid will be recognized as revenue. As ofAugust 31, 2020 , we have deferred recognition of$1.5 million in project management services to the Sky Ranch CAB. We perform certain construction activities at Sky Ranch. The activities performed include construction and maintenance of the grading, erosion and sediment control best management practices and other construction-related services. These activities are invoiced upon completion and are included in Land development inventories and subsequently expensed through Land development construction costs unless or until bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for public improvements. See Note 2 - Summary of Significant Account Policies - Land Development Segment Revenue -Reimbursable Costs for Public Improvements to the accompanying consolidated financial statements for details on repayment of reimbursable costs.
Other Revenue
Up-front payments we received pursuant to the Bison Lease and the OGOA are recognized as other income on a straight-line basis over the initial term or extension of term, as applicable, of these agreements.
Impairment of Water Assets and Other Long-Lived Assets
We review our long-lived assets for impairment at least annually or more
frequently if we believe events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If we believe it is more
likely than not that the carrying value of the long-lived asset exceeds its fair
value, then we perform a valuation to determine the fair value of the asset and
recognize an impairment loss equal to the excess of the carrying amount of the
asset over its fair value.
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Our Water Rights
During our fiscal 2020, there were no indicators of impairment related to our
water rights; therefore, we performed an impairment analysis as of August 31,
2020 , and determined that it is not more likely than not that the carrying value
of our water rights exceeds the fair value of the water rights. There have been
no material changes to our water rights which would indicate they are impaired
are or that their costs are not recoverable. Our analysis is based on
development occurring within areas in which we have agreements to provide water
services utilizing water rights owned by us (e.g., Sky Ranch and the Lowry
Range ) as well as in surrounding areas, including the Front Range and the I-70
corridor. Our water assets are being utilized to provide water services to
customers on the Lowry Range , at Wild Pointe and along the I-70 corridor
including Sky Ranch. We will continue to expand our water services as Sky Ranch
continues to develop and will continue to enhance our water rights in the water
courts. Our water supplies are legally decreed for use through the water court.
The water court decree allocates a specific amount of water (subject to
continued beneficial use) for municipal and industrial uses. Our combined
Rangeview Water Supply and Sky Ranch water assets have a carrying value of $53.9
million as of August 31, 2020 . Based on the carrying value of our water rights,
the long-term nature of any development plans, current tap fees of $27,209 and
estimated gross margins on these tap fees, we estimate that we would need to
serve a total of 4,250 water connections (requiring 7% of our portfolio) to
generate cash flows (deemed equivalent to fair value) sufficient to recover the
costs of our Rangeview Water Supply and Sky Ranch water. If our water tap fees
increase 5%, we would need to serve a total of 4,050 water connections
(requiring just under 7% of our portfolio) to recover the costs of our Rangeview
Water Supply and Sky Ranch water. If tap fees decrease 5%, we would need to
service a total of 4,500 water connections (requiring just over 7% of our
portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch
water.
Although the timing of actual new home development throughout the Front Range
will impact our tap sale projections, it will not alter our water ownership, our
service obligations to existing properties or the number of SFEs we can service;
therefore, no impairment indicators are present as of August 31, 2020 .
Our Land Development Assets
During our fiscal 2020, there were no indicators of impairment related to our land; therefore, we performed an impairment analysis as ofAugust 31, 2020 , and determined that it is not more likely than not that the carrying value of our land will exceed the fair value of the land. We are actively developing and selling lots at Sky Ranch. We have completed the initial filling at Sky Ranch for 506 lots, all of which are under contract, with 483 finished lots delivered and fully paid for as ofAugust 31, 2020 , and the remaining lots were delivered and paid for onNovember 3, 2020 . The 506 lots have a total sales price of$36.7 million with total land development costs expected to be$35.8 million . Additionally, we collected$10.5 million of public improvement reimbursables during the year endedAugust 31, 2020 , which will result in us realizing a net profit of$11.3 million on the sale of all 506 lots. We have constructed$18.5 million of remaining public improvements, which are potentially reimbursable from our first filing at Sky Ranch. If Sky Ranch home sales continue to be successful, we believe we will be able to collect these reimbursables from future Sky Ranch CAB bond proceeds. Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, upon receipt of reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development inventories by any remaining reimbursables received. The Company submits specific costs for reimbursement to the Sky Ranch CAB. If reimbursable costs received exceed actual expenses incurred by the Company for the cost of the public improvements, they are recorded as Other income as received. Subsequent toAugust 31, 2020 , we announced the second phase at Sky Ranch. The second phase will be platted for nearly 900 lots, for which we plan to begin development activities before the end of calendar 2020. Subsequent toAugust 31, 2020 , we entered into contracts with four home builders (Melody Homes (a wholly-owned subsidiary of DR Horton),KB Homes , Meritage Homes andChallenger Homes ), to sell 789 finished lots, on which the home builders will construct both attached and detached homes. We are retaining the remaining 100+ lots for future uses. The total sales price for the 789 lots contracted for is$63.4 million , subject to price escalations depending on development timing. The remaining lots held for future use, assuming comparable lot prices to the contracted prices and excluding escalations, would result in a total sales value for the second filing of$72.6 million . Our preliminary total cost estimates for developing the nearly 900 lots is$65.6 million . We believe that more than$48.0 million of this amount will be spent on public improvements that will be eligible for reimbursement by the Sky Ranch CAB subject to the conditions described above. As ofAugust 31, 2020 , our Sky Ranch land assets under development, shown as Land development inventories on our balance sheet, have a carrying value of$481,500 . Because per lot sales prices are increasing, per lot costs are not anticipated to increase materially, and we are continuing to actively develop the land, there are no indications of impairment. 37 -------------------------------------------------------------------------------- Table of Contents Other Assets In fiscal 2020, we assessed the recoverability of our 13,900 acres of mineral interests in theArkansas River Valley in southeasternColorado . We determined that it appears more likely than not that the carrying value of ourArkansas River Valley mineral rights is not recoverable as ofAugust 31, 2020 . As a result, we recorded a non-cash impairment charge of$1.4 million . The charge was recorded as a Non-cash mineral interest impairment charge in the consolidated statements of operations and comprehensive income included in Part II, Item 8 of this Annual Report. Fair Value Estimates Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. We generally use a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. The fair value of the investment securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit andU.S. treasuries. See Note 3 - Fair Value Measurements to the accompanying consolidated financial statements.
Share-based Compensation
We estimate the fair value of share-based payment awards made to key employees
and directors on the date of grant using the Black-Scholes option-pricing model.
We then expense the fair value over the vesting period of the grant using a
straight-line expense model. The fair value of share-based payments requires
management to estimate or calculate various inputs such as the volatility of the
underlying stock, the expected dividend rate, the estimated forfeiture rate, and
an estimated life of each option. We do not expect any forfeiture of option
grants; therefore, the compensation expense has not been reduced for estimated
forfeitures. These assumptions are based on historical trends and estimated
future actions of option holders and may not be indicative of actual events,
which may have a material impact on our financial statements. For further
details on share-based compensation expense, see Note 8 - Shareholders' Equity
to the accompanying consolidated financial statements.
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Results of Operations
Executive Summary of Results of Operations
The results of our operations for the fiscal years endedAugust 31, 2020 and 2019 were as follows: Change 2020 versus 2019 2020 2019 $ % Millions of gallons of water delivered 76.2 356.3 (280.1 ) (79 %) Municipal water usage revenues$ 524,000 $ 318,200 $ 205,800 65 % Oil and gas water usage revenues 512,800 4,238,400 (3,725,600 ) (88 %) Total metered water usage revenues$ 1,036,800 $
4,556,600
Water delivery operating costs incurred
(excluding depreciation and depletion) (804,100 ) (1,502,400 ) 698,300 46 % Gross margin for delivering water$ 232,700 $ 3,054,200 $ (2,821,500 ) (92 %) Gross margin % for delivering water 22 %
67 %
Wastewater treatment revenues$ 95,800 $ 35,800 $ 60,000 168 % Operating costs to treat wastewater (200,000 ) (28,000 ) (172,000 ) 614 % Gross margin for treating wastewater$ (104,200 ) $ 7,800 $ (112,000 ) (1,436 %) Gross margin % for treating wastewater (109 %)
22 %
Lot sales revenue$ 18,934,400 $ 11,956,000 $ 6,978,400 58 %
Lot development construction costs incurred (15,869,600 ) (11,305,000 ) (4,564,600 ) 40 % Gross margin on selling lots
$ 3,064,800 $ 651,000 $ 2,413,800 371 % Gross margin % on selling lots 16 %
5 %
Water and wastewater tap revenue$ 5,641,000 $ 3,642,500 $ 1,998,500 55 % General and administrative expenses$ 4,249,300 $ 3,106,500 $ 1,142,800 37 %
Non-cash mineral rights impairment charge
-$ 1,425,500 - Other income$ 7,405,800 $ 529,300 $ 6,876,500 1,299 % Net income$ 6,750,400 $ 4,811,100 $ 1,939,300 40 %
Changes in Revenues and Gross Margin
Water Usage Revenues and Margins - Our water deliveries decreased 79% in fiscal
2020 compared to fiscal 2019. Water revenues decreased 77% in fiscal 2020
compared to fiscal 2019 and our gross margin % dropped from 67% to 22%. These
changes were primarily due to a 100% decline in demand for water used by oil and
gas companies for hydraulic fracturing of oil wells, which was partially offset
by the increase in water used due to the sale of homes at Sky Ranch. Due to the
increase in water sales at Sky Ranch, municipal water delivered increased by
29%.
Water Usage Revenue Summary
The following table details the sources of our water sales, the number of kgal
(1,000 gallons) sold, and the average price per kgal for fiscal 2020 and fiscal
2019.
2020 2019
Sales Average per Sales Average per
Customer Type (in thousands) kgal kgal (in thousands) kgal kgal
On-Site $ 153.8 16,010.8 $ 9.61 $ 180.4 28,925.7 $ 6.24
Export-Commercial 78.3 7,226.1 10.84 68.0 7,350.7 9.25
Wild Pointe 100.3 25,235.2 3.97 62.9 21,113.9 2.98
Sky Ranch 191.6 26,828.5 7.14 7.0 901.7 7.76
Industrial (1) 87.0 927.9 93.76 4,238.3 298,014.0 14.22
$ 611.0 76,228.4 $ 8.02 $ 4,556.6 356,306.0 $ 12.79 (1) Industrial water revenue does not include
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Wastewater Treatment Revenues - Our wastewater treatment revenues increased 168%
in fiscal 2020 compared to fiscal 2019. The increase in wastewater revenues is a
result of the wastewater service provided to customers at Sky Ranch. In fiscal
2019, wastewater revenues were only recognized from one commercial customer.
Wastewater revenue fluctuations result from demand changes from our customers.
Water and Wastewater Tap Fees Revenues - We sold 188 water and wastewater taps
at Sky Ranch and 13 water taps at Wild Pointe during fiscal 2020, which
generated revenues of $5.6 million . We sold 113 water and wastewater taps at Sky
Ranch, one commercial water tap and six residential water taps at Wild Pointe
during fiscal 2019, which generated revenues of $3.6 million . We have 202 water
and wastewater taps remaining to be sold in the first phase of the development
at Sky Ranch, which we believe will be sold in our fiscal 2021.
Land Development Revenues - We broke ground on our first phase of Sky Ranch in
March 2018 . As of August 31, 2020 , we completed construction on all 506 lots and
delivered and received payment for 483 finished lots to home builders. We
delivered the remaining lots on November 3, 2020 . During fiscal 2020 and 2019,
we received $16.6 million and $15.6 million in lot sale proceeds, for a total of
$35.1 million since development started. During fiscal 2020 and 2019, we
recognized revenues of $18.9 million and $12.0 million using both the over time
and point in time accounting methods. Additionally, we have substantially
completed improvements (including over lot grading, water, sewer, and storm
water), off-site improvements (including drainage), and our entry roadway
(Monahan Road ), for the remaining lots, and carry those investments, totaling
$481,500 in Land development inventories in our financial statements. As of
October 31, 2020 , the builders have sold 315 homes at Sky Ranch. Based on
current sales rates, we believe the initial filing at Sky Ranch will be sold out
before the end of calendar 2021.
We act as the project manager and provide all services required to deliver
eligible improvements for the Sky Ranch CAB. For these services, we charge a
five percent (5%) project management fee calculated on actual construction of
Sky Ranch CAB eligible reimbursable improvements. No payment is required of the
Sky Ranch CAB for project management fees unless and until the Sky Ranch CAB
and/or Sky Ranch Districts issue bonds in an amount sufficient to pay us for all
or a portion of the project management fees. Because it is uncertain if bonds
will be issued and when we will receive payment, we defer recognition of project
management fee income from the Sky Ranch CAB until the issuance of the bonds is
certain. Once issuance of the bonds and payment to us is certain, the portion of
the project management fees repaid will be recognized as revenue. As of August
31, 2020 , we have deferred recognition of $1.5 million in project management
fees.
General and Administrative Expenses
The table below details significant items, and changes, included in our General
and Administrative Expenses ("G&A Expenses") as well as the impact that
share-based compensation has on our G&A Expenses for the fiscal years ended
Summary of G&A Expenses
Change
2020 versus 2019
2020 2019 $ %
Significant G&A Expense items:
Salary and salary-related expenses $ 2,362,300 $ 1,530,700 $ 831,600 54 %
Share-based compensation 517,000 336,200 180,800 54 %
Professional fees 498,500 458,200 40,300 9 %Fees paid to directors and D&O insurance 194,100 199,900
(5,800 ) (3 )%
Corporate insurance 71,800 52,700 19,100 36 %
Public entity-related expenses 125,100 118,400 6,700 6 %
Consulting fees 40,000 24,400 15,600 64 %
All other combined 440,500 386,000 54,500 14 %
G&A Expenses as reported $ 4,249,300 $ 3,106,500 $ 1,142,800 37 %
Salary and Salary-Related Expenses - Salary and salary-related expenses
increased by 54% for fiscal 2020 as compared to fiscal 2019. The increase in
fiscal 2020 compared to fiscal 2019 was the result of the increase from 29 to 31
employees to manage the development of our Sky Ranch property and our water and
wastewater systems. Additionally, we hired a Chief Financial Officer in April
2020 to help oversee the accounting, finance, IT, and operations teams, and help
implement strategic goals for our continued growth. Other increases include
higher incentive pay related to achieving development and financial goals,
increased benefit costs, payroll taxes and the addition of an employer match for
our 401(k) plan. Share-based compensation expense increased 54% for fiscal 2020
compared to fiscal 2019 as a result of an unrestricted stock grant to
non-employee board members and an increase in the fair value of stock option
grants to employees.
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Professional Fees (mainly legal and accounting fees) - Professional fees
increased 9% for fiscal 2020 compared to fiscal 2019. The increase was primarily
the result of higher accounting fees due to fees related to tax services and
higher professional fees related to business development.
Fees Paid to Our Board of Directors and Directors and Officers Insurance - Fees
for our board in fiscal 2020 include $67,900 for premiums related to our
directors and officers insurance policy (this amount increased by $6,800 from
fiscal 2019). The remaining fiscal 2020 fees of $126,200 represent amounts
earned by our board members for annual service, meeting attendance fees and
travel expenses, which were lower than in fiscal 2019 due to fewer board
meetings in fiscal 2020 and less travel expenses due to remote attendance in
some instances because of COVID 19. Fees for our board in fiscal 2019 include
$61,100 for premiums related to our directors and officers insurance policy. The
remaining fiscal 2019 fees of $138,800 represent amounts earned by our board
members for annual service, meeting attendance fees and travel expenses.
Public Entity-Related Expenses - Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EDGAR conversion fees, stock exchange fees, and press releases. These costs fluctuate from year to year. Consulting Fees - Consulting fees for fiscal 2020 consisted of$17,100 for information technology services,$16,500 for business development services and$6,400 for board advisory services related to the development of the Sky Ranch water agreements. Consulting fees for fiscal 2019 consisted of$4,000 for employee recruiting fees and other services,$11,600 for information technology services and$8,800 for board advisory services related to the development of the Sky Ranch water agreements. Other Expenses - Other expenses include typical operating expenses related to the maintenance of our office, business development, travel, property taxes, and funding provided to theRangeview District and the Sky Ranch Districts. Other expenses increased 14% during fiscal 2020 compared to fiscal 2019. The changes were primarily the result of the timing of various expenses and increased staffing. Non-cash mineral rights impairment charge - Non-cash mineral rights impairment charge includes an impairment recorded for$1.4 million as a result of the Company impairing itsArkansas Valley ,Colorado mineral rights. No impairment of long-lived assets were recorded in fiscal 2019.
Other Income and Expense Items
Change
For the Fiscal Years Ended
August 31, 2020 versus 2019
2020 2019 $ %
Other income items:
Reimbursement of construction costs -
related party $ 6,275,500 $ - $ 6,275,500 100 %
Oil and gas lease income, net $ 247,000 $ 55,700 $ 191,300 343 %
Oil and gas royalty income, net $ 669,000 $ 148,300 $ 520,700 351 %
Interest income $ 178,600 $ 298,600 $ (120,000 ) (40 )%
Other $ 35,700 $ 26,600 $ 9,100 (34 )%
Reimbursement of construction costs (related party) - On November 19, 2019 , the
Sky Ranch CAB sold tax-exempt, fixed rate senior bonds in the aggregate
principal amount of $11,435,000 and tax-exempt, fixed-rate subordinate bonds in
the aggregate principal amount of $1,765,000 (collectively, the "Bonds"). Upon
the sale of the Bonds approximately $10.5 million of the net proceeds from the
Bonds were used to partially reimburse us for advances we made to the Sky Ranch
CAB pursuant to the Sky Ranch FFAA to fund the construction of public
improvements to the Sky Ranch property. The remaining gross proceeds from the
issuance of the bonds, $2.7 million were retained by the Sky Ranch CAB in order
to pay certain bond issuance costs and provide for debt service through 2021,
when the Sky Ranch CAB expects to generate enough revenue through property taxes
to repay bond holders. Of the amounts we received, $4.2 million reduced the
remaining capitalized expenses in Land development inventories and $6.3 million
was recognized as Income from reimbursement of construction costs (related
party). The Company has no obligation for repaying the bonds in the event the
Sky Ranch CAB defaults on repaying the bond holders.
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Oil and gas lease income - The $247,000 and $55,700 of oil and gas lease
payments recognized in fiscal 2020 and fiscal 2019 include the recognition of
$55,700 in both fiscal 2020 and 2019 for the deferred up-front payment of
$167,200 that we received in October 2017 in connection with the Bison Lease,
which payment is being recognized in income over the three year term of the
Bison Lease, and the recognition of $191,300 in fiscal 2020 of the deferred
up-front payment of $573,700 that we received in July 2019 for the OGOA giving
the operator of the Sky Ranch O&G Lease (defined below) right to access 16 acres
for an oil and gas pad site for three years through July 2022 .
Oil and gas royalty income - Oil and gas royalty income represents amounts we
receive pursuant to the Sky Ranch O&G Lease as royalties for well production
from the six wells in our mineral estate at Sky Ranch. Pursuant to the Sky Ranch
O&G Lease, we receive 20% of the income generated by each well (after payment of
taxes by the oil and gas company). During the years ended August 31, 2020 and
2019, the six wells drilled on our property produced 413,700 and 50,600 barrels
of oil, respectively, resulting in oil and gas royalty income of $669,000 and
$148,300 , respectively.
The wells produce oil, gas, and natural gas liquids, which are hydrocarbons in
the same family of molecules as natural gas and crude oil, composed exclusively
of carbon and hydrogen.
Interest Income - Interest income represents interest earned on investment of
capital in cash equivalents or debt securities and interest accrued on the notes
receivable from the Rangeview District . The lower level of interest income in
fiscal 2020 compared to fiscal 2019 was primarily attributable to interest rates
on investments and timing of the maturity of the investments.
Liquidity, Capital Resources and Financial Position
AtAugust 31, 2020 , our working capital, defined as current assets less current liabilities, was$19.8 million , which includes$21.8 million in cash and cash equivalents. We believe that as ofAugust 31, 2020 , and as of the date of the filing of this Annual Report on Form 10-K, we had and have sufficient working capital to fund our operations for the next 12 months. We have substantially completed the work required to deliver all lots under contract in the first filing at Sky Ranch and are in the permitting process for the next filing at Sky Ranch. We estimate the cost to finish the nearly 900 lots expected to be platted in the second filing at Sky Ranch to be approximately$65.6 million . Of this, we estimate we will spend up to$15.0 million during fiscal 2021, and we anticipate receiving approximately$12.0 million in milestone payments from the homebuilders over the same period. Due to staffing shortages atArapahoe County and the disruption to its operations caused by COVID-19, permitting is taking longer than normal, but we do anticipate having permits and beginning construction of the next phase of development before the end of calendar 2020. We believe we can fund such capital expenditures from cash and cash equivalents on hand and phased payments from our lot sales agreements.
ECCV Capacity Operating System
InMay 2012 , we entered into an agreement to operate and maintain certain wells and transmission lines, the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our cost associated with the use of the ECCV system is a flat monthly fee of$8,000 per month fromJanuary 1, 2013 throughDecember 31, 2020 , which decreases to$3,000 per month fromJanuary 1, 2021 throughApril 30, 2032 . Additionally, we pay a fee per 1,000 gallons of water produced from ECCV's system, which is included in the water usage fees charged to customers. In addition, the ECCV system costs us approximately$5400 per month to maintain.
SMWSA is a municipal water authority in theState of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including theRangeview District . Pursuant to certain agreements with theRangeview District , we agreed to provide funding to theRangeview District in connection with its membership in the SMWSA. InJuly 2013 , theRangeview District , together with nine other SMWSA members, formed an SMWA to enable its members to participle in a cooperative water project known as WISE and entered into an agreement that specifies each member's pro rata share of WISE and the members' rights and obligations with respect to WISE. OnDecember 31, 2013 , SMWA,Denver Water , andAurora Water entered into theAmended and Restated WISE Partnership - Water Delivery Agreement, which provides for the purchase of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and amongRangeview District and the other nine members of the SMWA fromDenver Water andAurora Water . We have entered into a financing agreement that obligates us to fund theRangeview District's cost of participating in WISE. During the years endedAugust 31, 2020 and 2019, we provided$2.8 million and$1.5 million , respectively, of financing to theRangeview District to fund its obligation to purchase WISE water rights and pay for operational and construction charges. Ongoing funding requirements are dependent on operational and overhead costs of SMWA and the construction activities. We anticipate that we will be investing an additional$1.1 million in 2021 and$7.5 million in total for the fiscal years 2022 through 2025 to fund theRangeview District's obligation to purchase infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding theRangeview District's obligations in WISE, we will have the sole right to use and reuse theRangeview District's 9% share of the WISE water and infrastructure to provide water service to theRangeview District's customers and to receive the revenue from such service. 42 -------------------------------------------------------------------------------- Table of Contents Summary Cash Flows Change For the Fiscal Years Ended August 31, 2020 versus 2019 2020 2019 $ % Cash provided (used) by: Operating activities$ 20,720,100 $ 3,530,500 $ 17,189,600 487 % Investing activities$ (3,445,500 ) $ (10,803,800 ) $ 7,358,300 (68 )% Financing activities $ 44,800$ 186,200 $ (141,400 ) (76 )%
Changes in Operating Activities - Operating activities include amounts we receive from the sale of wholesale water and wastewater services, costs incurred in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, and G&A Expenses.
Cash provided by operations in fiscal 2020 increased$17.2 million as compared to fiscal 2019, which is primarily due to the reimbursement of capitalized costs of$10.5 million partially recorded in Land development inventories, the collection of up-front deferred oil and gas payments of$1.6 million , receipt of water and wastewater tap fees, receipt of lot sale proceeds, timing differences on payments of payables and accrued liabilities along with an increase in net income of$1.9 million . Cash provided by operations in fiscal 2019 consisted primarily of payments received relating to milestone payments from two builders at Sky Ranch that had been deferred, an upfront payment for industrial water and a payment for the OGOA that had been deferred, offset by increases in inventories related to the construction activities of Sky Ranch, and the payment of approximately$1.0 million for a collateral deposit paid toArapahoe County in connection with the grading, erosion and sediment control permit application for Sky Ranch, coupled with the increase in net income due primarily to recognized revenue from water and wastewater tap fees of$3.5 million . Changes in Investing Activities - Investing activities in fiscal 2020 consisted of the sale and maturity of debt securities of$6.9 million offset by the purchase of$1.7 million in securities, the investment in our land and water system of$8.0 million , and the purchase of equipment of$586,000 . Investing activities in fiscal 2019 consisted of the sale and maturity of debt securities of$56 million offset by the purchase of$52 million in securities, the investment in our water system of$14.1 million , and the purchase of equipment of$354,000 . Changes in Financing Activities - Financing activities in 2020 consisted of proceeds from the exercise of stock options of$49,200 , offset by a payment to contingent liability holders of$4,400 . Financing activities in 2019 consisted of proceeds from the exercise of stock options of$193,100 , offset by a payment to contingent liability holders of$6,900 .
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist entirely of the contingent portion of the Comprehensive Amendment Agreement No. 1 (the "CAA"), which is$647,200 , as described in Note 5 - Participating Interests in Export Water to the accompanying consolidated financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to the accompanying consolidated financial statements for recently adopted and issued accounting pronouncements.
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