REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Vidler Water Resources, Inc.
Carson City, Nevada
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vidler Water Resources, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Intangible Water Assets — Impairment — Refer to Note 3 to the financial statements
Critical Audit Matter Description
The Company’s intangible water assets are accounted for as indefinite-lived intangible assets. Accordingly, until an water asset is sold, it is not amortized, that is, its value is not charged as an expense in the consolidated statement of operations and comprehensive income over time, but the asset is carried at cost and reviewed for impairment, at least annually during the fourth quarter, and more frequently if a specific event occurs or there are changes in circumstances which suggest that the asset may be impaired. Such events or changes may include lawsuits, court decisions, regulatory mandates, and economic conditions, including interest rates, demand for residential and commercial real estate, changes in population, and increases or decreases in prices of similar assets. If the carrying value exceeds the fair value, an impairment loss is recognized equal to the difference. Once an asset is sold, the value is charged to cost of real estate and water assets sold in the Company’s consolidated statement of operations and comprehensive income.
When the Company calculates the fair value of intangible water assets, they use a discounted cash flow model, under which the future net cash flows from the asset are forecasted and then discounted back to their present value, using a weighted average cost of capital approach to determine the appropriate discount rate. Preparing these cash flow models requires the Company to make significant assumptions about revenues and expenses as well as the specific risks inherent in the assets. The Company
conducts extensive reviews utilizing the most recent information available; however, the review process inevitably involves the use of significant estimates and assumptions, especially the estimated current asset pricing, potential price escalation, income tax rates, discount rates, absorption rates and timing, and demand for these assets. These models are sensitive to minor changes in any of the input variables.
There were no material impairment losses recorded on intangible water assets during the year ended December 31, 2021. Total intangible water assets balance was $120.0 million as of December 31, 2021, of which $107.2 million is located within the region of northern Nevada.
We identified the estimated discount rate and absorption rate assumptions within the Company’s discounted cash flow model utilized to determine impairment of intangible water assets located within the region of northern Nevada as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of those intangible water assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s discounted future cash flows analysis.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discounted future cash flows analysis included the following, among others:
a.With the assistance of our fair value specialists, we evaluated the discounted future cash flows analysis, including estimates of discount rates and absorption rates by (1) evaluating the appropriateness of the valuation methodology, (2) assessing the reasonableness of the discount rate and absorption rate assumptions used by management and (3) testing the mathematical accuracy of the discounted future cash flows analysis.
b.We evaluated the reasonableness of management’s discounted future cash flows analysis by comparing management’s projections to the Company’s historical results and external market sources.
Income Taxes — Realizability of Deferred Tax Assets — Refer to Note 7 to the financial statements
Critical Audit Matter Description
The Company recognizes deferred income taxes for tax attributes and for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the deferred tax liability or asset is expected to be settled or realized. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Future realization of deferred tax assets depends on the existence of sufficient taxable income of the appropriate character. Sources of taxable income considered in the evaluation of deferred tax asset realization include future reversals of deferred tax assets and liabilities, expected future taxable income, taxable income in prior carryback years if permitted under the tax law, and tax planning strategies. Management has recorded valuation allowances for those deferred tax assets not expected to be realized. As the Company has achieved a sufficient history of sustained profitability, including taxable income in appropriate jurisdictions, a portion of the valuation allowance was reduced by $21.7 million during the year ended December 31, 2021. Management has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize certain of its deferred tax assets. The Company maintains valuation allowances of $36.4 million as of December 31, 2021 for deferred tax assets not expected to be realized in the future.
We identified management’s determination that it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets as a critical audit matter because of the significant judgments and estimates management makes related to taxable income across multiple jurisdictions. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates of taxable income.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination that it is more likely than not that certain of the Company’s deferred tax assets will be realized included the following, among others:
a.We evaluated the reasonableness of the methods, assumptions, and judgments used by management to determine whether a deferred tax asset would be realized in the future.
a.With the assistance of our income tax specialists, we evaluated whether the sources of management’s estimated taxable income were of the appropriate character and sufficient to utilize the deferred tax assets under the relevant tax law.
a.We evaluated management’s ability to accurately estimate taxable income by comparing actual results to management’s historical estimates and evaluating whether there have been any changes that would affect management’s ability to accurately estimate taxable income.
a.We tested the reasonableness of management’s estimates of taxable income by comparing the estimates to:
–Expiration dates or carryforward periods of tax attributes.
–Available and intended tax planning strategies.
–Internal budgets.
–Historical taxable income, as adjusted for nonrecurring items.
–Internal communications to management and the Board of Directors.
–Forecasted information included in Company press releases.
–Management’s history of carrying out its stated plans and its ability to carry out its plans considering contractual commitments or available financing.
a.We evaluated whether the estimates of future taxable income were consistent with evidence obtained in other areas of the audit.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 21, 2022
We have served as the Company's auditor since 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOOTNOTE INDEX
1.NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations:
Vidler Water Resources, Inc., together with its subsidiaries (collectively, “Vidler” or the “Company”), is a holding company. As of December 31, 2021, the Company has presented its consolidated financial statements and the accompanying notes to the consolidated financial statements using the guidelines prescribed for real estate companies, as the majority of the Company’s assets and operations are primarily engaged in real estate and related activities.
The Company’s most significant operating subsidiary as of December 31, 2021 was Vidler Water Company, Inc. (“Vidler Water”), a Nevada corporation. Vidler owns water resources and water storage in the southwestern United States, with assets and operations in Nevada, Arizona, Colorado, and New Mexico. Currently, Vidler is primarily focused on selling its existing water rights and storage credits.
Smaller Reporting Company:
The Company qualifies as a Smaller Reporting Company (“SRC”) under the Securities and Exchange Commission (“SEC”) definition and therefore certain disclosures that are no longer required have been removed in accordance with the SEC’s disclosure requirements for SRCs.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, majority-owned and controlled subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s consolidated financial statements relate to intangibles, real estate and water assets, deferred income taxes, stock-based compensation, and contingent liabilities. While management believes that the carrying value of such assets and liabilities were appropriate as of December 31, 2021 and December 31, 2020, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
Tangible Water Assets and Real Estate:
Tangible water assets and real estate include the cost of certain tangible water assets, water storage credits and related storage facilities, real estate, including raw land and improvements. The Company capitalizes pre-acquisition costs, the purchase price of real estate, development costs and other allocated costs, including any interest, during development and construction. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of sales when the Company determines continuation of the related project is not probable.
Additional costs to develop or otherwise get tangible water and real estate assets ready for their intended use are capitalized. These costs typically include direct construction costs, legal fees, engineering, consulting, direct cost of drilling wells or related construction, and any interest costs capitalized on qualifying assets during the development period. The Company expenses all maintenance and repair costs. The types of costs capitalized are consistent across periods presented. Tangible water assets consist of various water interests in development or awaiting permitting. Amortization of real estate improvements is computed on the straight-line method over the estimated useful lives of the improvements ranging from 5 to 15 years.
Intangible Water Assets:
Intangible water assets include the costs of indefinite-lived intangible assets and is comprised of water rights and the exclusive right to use two water transportation pipelines. The Company capitalizes development and entitlement costs and other allocated costs, including any interest, during the development period of the assets to tangible water assets and transfers the costs to intangible water assets when water rights are permitted. Water rights consist of various water interests acquired or developed independently or in conjunction with the acquisition of real estate. When the Company purchases intangible water assets that are attached to real estate, an allocation of the total purchase price, including any direct costs of the acquisition, is made at the date of acquisition based on the estimated relative fair values of the water rights and the real estate.
Intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired, by comparing the fair value of the assets to their carrying amounts. The fair value of the intangible assets is calculated using discounted cash flow models that incorporate a wide range of assumptions including current asset pricing, price escalation, discount rates, absorption rates, timing of sales, and costs. These models are sensitive to minor changes in any of the input variables.
Impairment of Long-Lived Assets:
The Company records an impairment loss when the condition exists where the carrying amount of a long-lived asset or asset group is not recoverable. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for which there is identifiable cash flows that are independent of the cash flows of other groups of assets do not exceed the carrying amount. The Company prepares and analyzes cash flows at appropriate levels of grouped assets. If the events or circumstances indicate that the remaining balance may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset.
Noncontrolling Interests:
The Company reports the share of the results of operations that are attributable to other owners of its consolidated subsidiaries that are less than wholly-owned as noncontrolling interest in the accompanying consolidated financial statements. In the consolidated statement of operations and comprehensive income, the income attributable to the noncontrolling interest is reported separately and the accumulated income or loss attributable to the noncontrolling interest, along with any changes in ownership of the subsidiary, is reported within shareholders’ equity.
Cash and Cash Equivalents:
Cash and cash equivalents include short-term, highly liquid instruments, purchased with original maturities of three months or less.
Other Assets:
Other assets include the following significant account balances:
Property, Plant and Equipment, Net:
Property, plant and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated lives of the assets. Buildings and leasehold improvements are depreciated over the shorter of the useful life or lease term and range from 15 to 30 years, office furniture and fixtures are generally depreciated over seven years, and computer equipment is depreciated over three years. Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized. Gains or losses on the sale of property, plant and equipment are included in other income.
Accounts payable and accrued expenses:
Accounts payable and accrued expenses includes trade payables and accrued construction payables.
Other Liabilities:
Other liabilities primarily includes employee benefits, unearned revenues, option payments and deposits received.
Revenue Recognition:
Sale of Real Estate and Water Assets:
Revenue recognition on the sale of real estate and water assets conforms with accounting literature related to the sale of real estate, and is recognized in full when there is a legally binding sale contract, the profit is determinable (the collectability of the sales price is reasonably assured, or any amount that will not be collectible can be estimated), the earnings process is virtually complete (the Company is not obligated to perform significant activities after the sale to earn the profit, meaning the Company has transferred all risks and rewards to the buyer). If these conditions are not met, the Company records the cash received as deferred revenue until the conditions to recognize full profit are met.
Other Income, Net:
Included in other income are various transactional results including realized gains and losses from the sale of investments and property, plant and equipment, interest income, sales of oil and gas, and other sources not considered to be the core focus of the existing operating entities within the group.
Cost of Sales:
Cost of Real Estate and Water Assets:
Cost of real estate and water assets sold includes direct costs of the acquisition of the asset less any impairment losses previously recorded against the asset, development costs incurred to get the asset ready for use, and any capitalized interest costs incurred during the development period.
General, Administrative, and Other:
General, administrative, and other costs include salaries and benefits, stock-based compensation, consulting, audit, tax, legal, insurance, property taxes, rent and utilities, selling costs, and other general operating expenses.
Stock-Based Compensation:
Stock-based compensation expense is measured at the grant date based on the fair values of the awards, calculated using the closing stock price on the date of grant, and is recognized as expense over the period in which the share-based compensation vests using the straight-line method. When an employee restricted stock unit (“RSU”) vests, the recipient receives a new share of Vidler common stock for each RSU, less the number of shares of common stock equal in value to applicable withholding taxes. When an RSU is forfeited, all previously recognized expense is reversed during the respective forfeiture year and the remaining unamortized expense is canceled.
Accounting for Income Taxes:
The Company’s provision for income tax expense includes federal and state income taxes currently payable and those deferred because of temporary differences between the income tax and financial reporting bases of the assets and liabilities. The asset and liability method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred income taxes in income in the period in which the change is enacted.
In assessing the realization of deferred income taxes, management considers whether it is more likely than not that any deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which temporary differences become deductible. If it is more likely than not that some or all of the deferred income tax assets will not be realized a valuation allowance is recorded. At December 31, 2021, the Company concluded that it is more likely than not that some of its deferred tax assets will be realized, and accordingly, the valuation allowance was recorded only against the deferred tax assets that are not more likely than not to be realized.
The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized unless it has a greater than a 50% likelihood of being sustained. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense.
Earnings per Share:
Basic earnings or loss per share was computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings or loss per share was computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s performance-based price-contingent stock options (“PBO”), and RSU are considered common stock equivalents for this purpose. The number of additional shares related to these common stock equivalents is calculated using the treasury stock method.
For the years ended December 31, 2021 and December 31, 2020 there was no anti-dilution.
Recently Issued Accounting Pronouncements:
In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance in response to concerns about the structural risks of interbank offered rates, and particularly the risk of cessation of the London Interbank Offered Rate (LIBOR). The cessation of the publication of LIBOR occurred on December 31, 2021. The Company has an operating agreement with Fish Springs Ranch, LLC which entitles Vidler Water to receive interest on certain development costs, construction costs, and accrued interest at a rate of LIBOR plus 450 basis points. The Company is in the process of evaluating the alternatives to the LIBOR rate.
2. TANGIBLE WATER ASSETS AND REAL ESTATE, NET
The cost assigned to the various components of tangible water and real estate assets were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Tangible water assets | $ | 21,667 | | | $ | 26,546 | |
Real estate and improvements held and used, net of accumulated amortization of $12,003 at December 31, 2021 and December 31, 2020 | 9,469 | | | 9,469 | |
| Other real estate inventories | 3,359 | | | 3,359 | |
| Total tangible water and real estate assets, net | $ | 34,495 | | | $ | 39,374 | |
The Company’s real estate improvements were fully depreciated at December 31, 2016.
3. INTANGIBLE ASSETS
The Company’s carrying amounts of its intangible assets were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Pipeline rights, water rights, and water credits at Fish Springs Ranch | $ | 80,860 | | | $ | 81,574 | |
| Pipeline rights and water rights at Carson-Lyon | 26,323 | | | 25,643 | |
| Other | 12,780 | | | 13,228 | |
| Total intangible assets | $ | 119,963 | | | $ | 120,445 | |
Fish Springs Ranch Pipeline Rights, Water Rights, and Water Credits:
There are 13,000 acre-feet per-year of permitted water rights at Fish Springs Ranch. The existing permit allows up to 8,000 acre-feet of water per year to be exported to support the development in the Reno, Nevada area. As of December 31, 2021, the Company has sold 372 acre-feet of water credits. Under a settlement agreement signed in 2007, the Pyramid Lake Paiute Tribe (the “Tribe”) agreed to not oppose any permitting activities for the pumping and export of groundwater in excess of 8,000 acre-feet of water per year, and in exchange, Fish Springs Ranch will pay the Tribe 12% of the gross sales price for each acre-foot of additional water that Fish Springs Ranch sells in excess of 8,000 acre-feet per year, up to 13,000 acre-feet per year. The obligation to expense and pay the 12% fee is due only if and when the Company sells water in excess of 8,000 acre-feet, and accordingly, Fish Springs Ranch will record the liability for such amounts as they become due upon the sale of any such excess water. Currently, Fish Springs Ranch does not have regulatory approval to export any water in excess of 8,000 acre-feet per year from Fish Springs Ranch to support further development in northern Reno, and it is uncertain whether such regulatory approval will be granted in the future.
Carson-Lyon Pipeline Rights and Water Rights:
During the year ended December 31, 2021 an additional 45 acre-feet of municipal and industrial designated groundwater rights were purchased for $690,000. No additional rights were purchased in 2020.
Impairment Losses:
There were no impairment losses recognized on intangible assets during the years ended December 31, 2021 and 2020.
4. LEASES
The Company has an operating lease for the office located in Carson City, Nevada which include monthly rental payments. The operating lease for the office located in La Jolla, California concluded at the end of May 2020.
Leases consisted of the following (in thousands):
| | | | | | | | |
| Leases | December 31, 2021 | December 31, 2020 |
| Assets | | |
Operating lease ROU assets, net(1) | $ | 240 | | $ | 396 | |
| Liabilities | | |
| Operating lease liabilities | $ | 240 | | $ | 396 | |
| | |
| Weighted Average Remaining Lease Term | 1.5 years | 2.5 years |
| | |
(1) Operating lease ROU assets are recorded net of accumulated amortization of $156,000 and $77,000 as of December 31, 2021 and December 31, 2020 respectively.
Supplemental cash flow information related to leases is as follows (in thousands):
| | | | | | | | |
| Year Ended December 31, 2021 | Year Ended December 31, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows for operating leases | $ | 156 | | $ | 244 | |
5. COMMITMENTS AND CONTINGENCIES
The Company leases its office under a non-cancelable operating lease that expires in 2023. Rent expense for the years ended December 31, 2021 and 2020 for office space was $156,000 and $244,000, respectively.
Future minimum payments under all operating leases were as follows (in thousands):
| | | | | |
| Year ended December 31, | |
| |
| 2022 | $ | 159 | |
| 2023 | 81 | |
| Thereafter | — | |
| Total | $ | 240 | |
Except as described in ITEM 1. BUSINESS, (Kane Springs), and in ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES (LEGAL DEVELOPMENTS), neither Vidler, nor our subsidiaries are parties to any potentially material pending legal proceedings.
The Company is subject to various litigation matters that arise in the ordinary course of its business. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of the Company’s potential liability. The Company regularly reviews contingencies to determine the adequacy of accruals and related disclosures. The amount of ultimate loss may differ from these estimates, and it is possible that the Company’s consolidated financial statements could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on the consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
6. STOCK-BASED COMPENSATION
At December 31, 2021, the Company had one stock-based payment arrangement outstanding, the Vidler Water Resources, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).
The 2014 Plan provides for the issuance of up to 3.3 million shares of common stock in the form of performance-based price-contingent stock options (“PBO”), restricted stock unit (“RSU”), stock-settled stock appreciation rights (“SAR”), non-statutory stock options, restricted stock awards (“RSA”), performance shares, performance units, deferred compensation awards, and other stock-based awards to employees, directors, and consultants of the Company (or any present or future parent or subsidiary corporation or other affiliated entity of the Company). The 2014 Plan allows for broker assisted cashless exercises and net-settlement of income taxes and employee withholding taxes. Upon exercise of a PBO, RSU, or SAR, the employee will receive newly issued shares of Vidler common stock with a fair value equal to the in-the-money value of the award, less applicable federal, state and local withholding and income taxes (however, the holder can elect to pay withholding taxes in cash).
The Company recorded total stock-based compensation expense of $108,000 and $540,000 during the years ended December 31, 2021 and 2020, respectively. The amounts recorded in 2021 and 2020 reflect the actual grant of RSU for bonus accruals made in 2020 and 2019 for 2020 and 2019 performance, respectively.
Performance-Based Options (PBO):
At various times, the Company has awarded PBO to various members of management. All of the PBO issued contain a market condition based on the achievement of a stock price target during the contractual term and vest monthly over a three-year period. The vested portion of the options may be exercised only if the 30-trading-day average closing sales price of the Company’s common stock equals or exceeds 125% of the grant date stock price. The stock price contingency may be met any time before the options expire and it only needs to be met once for the PBO to remain exercisable for the remainder of the term. Compensation expense is amortized on a straight-line basis over the requisite service period for the entire award, which is the vesting period of the award. However, any unrecognized compensation expense for unvested awards can be accelerated if the vesting period is modified.
The estimated fair value of the Company’s PBO was determined using a Monte Carlo model, which incorporated the following assumptions:
| | | | | | | | | | | |
| | | 2014
10-Year Option | | |
| Grant date | | | 11/14/2014 | | |
| Expiration date | | | 11/14/2024 | | |
| Grant date stock price | | | $ | 19.51 | | | |
| Historical volatility | | | 35.00 | % | | |
| Risk-free rate (annualized) | | | 2.38 | % | | |
| Dividend yield (annualized) | | | — | % | | |
| PBO granted | | | 167,619 | | | |
| Weighted average grant date fair value | | | $ | 6.51 | | | |
| Fair value of award on grant date | | | $ | 1,475,705 | | | |
The determination of the fair value of PBO using an option valuation model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. The volatility is calculated through an analysis based on historical daily returns of Vidler’s stock over a look-back period equal to the PBO contractual term. The risk-free interest rate assumption is based upon a risk-neutral framework using the 10-year zero-coupon risk-free interest rates derived from the treasury constant maturities yield curve on the grant date, for the 10-year PBO award. The dividend yield assumption was based on the expectation of no future dividend payouts by the Company.
A summary of PBO activity was as follows:
| | | | | | | | | | | |
| Performance-Based Options | | Weighted-Average Exercise Price Per Share |
| Outstanding at December 31, 2019 | 167,619 | | | $ | 14.51 | |
| Granted | — | | | |
| Forfeited | — | | | |
| Outstanding at December 31,2020 | 167,619 | | | $ | 14.51 | |
| Granted | — | | | |
| Forfeited | — | | | |
| Outstanding at December 31, 2021 | 167,619 | | | $ | 14.51 | |
At December 31, 2021, 167,619 PBO outstanding are exercisable for up to 10 years from the grant date.
| | | | | | | | | | | | | | | | | | | | | | | |
| Performance-Based Options | | Weighted-Average Exercise Price Per Share | | Weighted-Average Contractual Term Remaining (Years) | | Aggregate Intrinsic Value |
| Vested at December 31, 2019 | 167,619 | | | $ | 14.51 | | | 4.9 | | $ | — | |
| Vested | — | | | | | | | |
| Forfeited | — | | | | | | | |
| Vested at December 31, 2020 | 167,619 | | | $ | 14.51 | | | 3.9 | | $ | — | |
| Vested | — | | | | | | | |
| Forfeited | — | | | | | | | |
| Vested at December 31, 2021 | 167,619 | | | $ | 14.51 | | | 2.9 | | $ | — | |
For the years ended December 31, 2021 and 2020, there were no PBO exercisable as the market condition had not been met. There was no unrecognized compensation cost related to unvested PBO at December 31, 2021 and 2020.
Restricted Stock Units (RSU):
RSU awards the recipient, who must be continuously employed by the Company until the vesting date, unless the employment contracts stipulate otherwise, the right to receive one share of the Company’s common stock. RSU issued to management do not vote and are not entitled to receive dividends, however the RSU issued to the Company’s directors are entitled to dividends.
A summary of RSU activity was as follows:
| | | | | | | | | | | |
| RSU Shares | | Weighted-Average Grant Date Fair Value Per Share |
| Outstanding and unvested at December 31, 2019 | — | | | $ | — | |
| Granted | 58,938 | | | $ | 9.17 | |
| Vested | (58,938) | | | $ | 9.17 | |
| Forfeited | — | | | $ | — | |
| Outstanding and unvested at December 31, 2020 | — | | | $ | — | |
| Granted | 11,975 | | | $ | 9.02 | |
| Vested | (11,975) | | | $ | 9.02 | |
| Forfeited | — | | | $ | — | |
| Outstanding and unvested at December 31, 2021 | — | | | $ | — | |
There was no unrecognized compensation cost related to unvested RSU for the years ended December 31, 2021, and 2020.
7. FEDERAL AND STATE CURRENT AND DEFERRED INCOME TAX
The Company and its subsidiaries file a consolidated federal income tax return. Companies that are less than 80% owned corporations, or entities that are treated as partnerships for federal income tax purposes, file separate federal income tax returns. All of the Company’s pre-tax book income from continuing operations in each of the two years ended December 31, 2021 and 2020 was generated in the U.S. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The Company’s income tax (provision) benefit for federal and state income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | |
| Current tax (provision) benefit | $ | (55) | | | $ | (7) | | | |
| Deferred tax benefit | 18,165 | | | 9,340 | | | |
| Total income tax benefit | $ | 18,110 | | | $ | 9,333 | | | |
The difference between income taxes provided at the Company’s federal statutory rate and effective tax rate was as follows (in thousands):
| | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | |
| Federal income tax (provision) benefit at statutory rate | $ | (3,108) | | | $ | (147) | | | |
| Change in valuation allowance | 21,718 | | | 10,275 | | | |
| | | | | |
| State taxes, net of federal benefit | (338) | | | 373 | | | |
| | | | | |
| | | | | |
| Expired credits | | | (1,505) | | | |
| Deferred Tax true ups | 66 | | | 362 | | | |
| Other | (228) | | | (25) | | | |
| Total income tax benefit | $ | 18,110 | | | $ | 9,333 | | | |
The significant components of deferred income tax assets and liabilities were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net operating losses, capital losses, and tax credit carryforwards | $ | 54,449 | | | $ | 57,901 | |
| | | |
| | | |
| Impairment loss on water assets | 9,155 | | | 9,864 | |
| | | |
| | | |
| Employee benefits, including stock-based compensation | 1,098 | | | 556 | |
| Excess tax basis in affiliate | 459 | | | 475 | |
| Fixed assets | 674 | | | 700 | |
| Other, net | 441 | | | 450 | |
| Total deferred tax assets | 66,276 | | | 69,946 | |
| Deferred tax liabilities: | | | |
| | | |
| Revaluation of real estate and water assets | 2,005 | | | 2,072 | |
| | | |
| | | |
| Other, net | 399 | | | 449 | |
| Total deferred tax liabilities | 2,404 | | | 2,521 | |
| Valuation allowance | (36,367) | | | (58,085) | |
| Net deferred income tax asset | $ | 27,505 | | | $ | 9,340 | |
Deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in circumstances that would influence management’s conclusions as to the ultimate realization of deferred tax assets. Valuation allowances are established and maintained for deferred tax assets on a “more likely than not” threshold. At December 31, 2011, the Company considered it more likely than not that the deferred tax assets would not be realized and a full valuation allowance was provided. At December 31, 2020, after evaluating the evidence, including positive objective evidence in the form of three years of cumulative historical pre-tax book income, management concluded that there was sufficient positive evidence to enable the Company to conclude that it was “more likely than not” that certain of these deferred tax assets would be realized, and the Company released a portion of the valuation allowance which resulted in the recognition of certain deferred tax assets with a corresponding decrease to income tax expense of $9.3 million for the year ended December 31, 2020. At December 31, 2021 an additional $21.7 million of valuation allowance was released.
The Company had net operating loss carryforwards, federal tax credit carryforwards, and state capital loss carryforwards as of December 31, 2021, that will expire if not utilized. The following table summarizes such carryforwards and their expiration as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Federal Net Operating Losses | | Federal Tax Credits | | State Net Operating Losses | | State and Federal Capital Losses |
| Expire 2022 | | $ | — | | | $ | 177 | | | $ | — | | | $ | 82,807 | |
| Expire 2023 through 2027 | | — | | | 445 | | | — | | | 1,435 | |
| Expire 2028 through 2032 | | 34,745 | | | 3,459 | | | 34,097 | | | — | |
| Expire 2033 through 2038 | | 98,705 | | | 1,104 | | | 91,842 | | | — | |
| Indefinite Expiry | | 6,256 | | | — | | | — | | | — | |
| Total | | $ | 139,706 | | | $ | 5,185 | | | $ | 125,939 | | | $ | 84,242 | |
Utilization of the Company's U.S. federal and certain state net operating loss and tax credit carryovers may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As of December 31, 2021, the Company believes that utilization of its federal net operating losses and federal tax credits are not limited under any ownership change limitations provided under the Internal Revenue Code. The tax benefit preservation plan readopted by the Company in 2020 provides protections to preserve the Company’s ability to utilize its net operating loss carryforwards as a result of certain stock ownership changes in the future.
The Company does not have any uncertain tax benefits recorded for the years ended December 31, 2021 and 2020. The Company’s policy is to recognize interest and penalties related to uncertain tax benefits in its provision for income taxes. For the years ended December 31, 2021 and 2020 the Company has not recorded any interest or penalties related to uncertain tax benefits.
The Company is subject to taxation in the U.S. and various state jurisdictions. As of December 31, 2021, the Company's statute is open from 2017 and 2016 forward for federal and for state tax purposes, respectively. However, years prior to 2016 could still be considered open for adjustment to NOL and tax credit carryforwards.
8. RELATED-PARTY TRANSACTIONS
Executive Bonus Plan:
On August 2, 2018, the Company adopted an Amended and Restated Executive Bonus Plan (the “Amended Bonus Plan”) to provide for the payment of bonuses to Ms. Timian-Palmer and Mr. Webb (collectively, the “Plan Participants”). The Amended Bonus Plan, which has a term of five years from January 1, 2018 through December 31, 2022, amends, restates and supersedes the Company’s Executive Bonus Plan adopted on December 14, 2016 (the “Prior Bonus Plan”).
Pursuant to the terms of the Amended Bonus Plan, a pool of funds will be created for distribution on a yearly basis (the “Bonus Pool”). The first step in calculating the Bonus Pool is to calculate the total revenues and other income of the Company during the year (other than any revenues or other income attributed to the Company’s investments in Synthonics, Inc. and Mindjet Inc. and the Company’s deferred compensation plans (the “Excluded Assets”)) minus (a) the gross invested capital for each asset of the Company (other than an Excluded Asset) that was sold or otherwise disposed of during such year, defined as the book value of such asset as of the date of the sale (or other disposition) of such asset, as determined in accordance with U.S. GAAP and reflected in the Company’s financial records as of such date, plus any impairment or depreciation charges taken by the Company with respect to such asset on or prior to such date; (b) an amount equal to the aggregate of the gross invested capital for each relevant asset as determined pursuant to the immediately preceding clause (a), multiplied by the amount of years (including any partial year) elapsed between January 1, 2018 and the date of the sale or other disposal of such asset, multiplied by 5%; and (c) administrative expenses specified in the Amended Bonus Plan (such resulting amount, the “Total Net Gain”). For assets sold (or otherwise disposed of) entirely or partially for non-cash consideration by the Company, the calculation of Total Net Gain with respect to the non-cash consideration will instead be made in the year in which the non-cash consideration is ultimately sold (or otherwise disposed of) for cash by the Company.
The second step in calculating the Bonus Pool is to multiply the Total Net Gain by the “Adjustment Factor”, which is the greater of (i) a fraction, the numerator of which is the total amount of cash distributed (or committed to be distributed) to the Company’s shareholders with respect to all such assets sold (or otherwise disposed of) during the year, and the denominator of which is the total amount of cash received (after payment of all selling costs, including bankers’ fees and commissions) for which all such assets were sold (or otherwise disposed of) during the year, or (ii) such percentage (not to exceed 100%) as the Compensation Committee of the Board of Directors (the “Compensation Committee”) determines in its sole discretion to utilize as the Adjustment Factor. The amount that results from multiplying the Total Net Gain by the Adjustment Factor is the “Adjusted Net Gain.”
The final step in calculating the Bonus Pool is to multiply the Adjusted Net Gain by 8.75%, which results in the actual Bonus Pool. The Bonus Pool will be allocated 55% to Ms. Timian-Palmer and 45% to Mr. Webb. Each Plan Participant will be entitled to his or her allocated portion of the Bonus Pool for the year if he or she is employed by the Company on the last day of the year. Any bonus paid pursuant to the Amended Bonus Plan will be paid 50% in the form of cash and 50% in the form of a RSU award, except that if a Plan Participant incurs a separation from service prior to the date that such RSU awards are scheduled to be granted, such bonus will be paid entirely in the form of cash. Such RSU awards shall be granted pursuant to the terms of the 2014 Plan, will be fully vested on the date of grant, and the number of RSUs subject to such award will be equal to (x) the dollar value of 50% of the total amount of such bonus, divided by (y) the average of the daily volume weighted average prices (the “VWAP”) of the Company’s common stock for all of the trading days during the 30 calendar day period ending on (and including) the last trading day immediately prior to the grant date of such award, rounded down to the nearest whole share. The issuance of any shares pursuant to such RSU awards will occur on the earlier of (i) the third anniversary of the date of grant of such RSU award, (ii) a Plan Participant’s separation from service or (iii) a change of control.
In the event that any Plan Participant’s employment with the Company is terminated in certain circumstances as provided in a written agreement between the Company and such Plan Participant, as applicable, the terminated individual will be entitled to payment of an amount under the Amended Bonus Plan for a portion of the year in which such termination occurs. In order to calculate such amount, the Compensation Committee will first determine the Total Net Gain for the portion of the year prior to such individual’s termination (which Total Net Gain will be determined in the same manner as described above based on the actual revenues or other income of the Company (including sales or other dispositions of assets) during such partial year period; provided, however, that the amount of administrative expenses for such portion of the year will be prorated based on the Compensation Committee’s estimate of the total amount of administrative expenses for such year) (such amount, the “Pro Rata Net Gain”). Second, the Pro Rata Net Gain is multiplied by an adjustment factor which is the greater of (i) a fraction, the numerator of which is the amount of cash distributed (or committed to be distributed) to the Company’s shareholders in connection with the Company’s sale (or other disposition) of assets during such portion of the year, and the denominator of which is the total amount of cash received for which all assets were sold (or otherwise disposed of) during such portion of the year, or (ii) such percentage (not to exceed 100%) as the Compensation Committee determines in its sole discretion to utilize as the Adjustment Factor. The resulting amount is multiplied by 8.75% to arrive at the “Termination Bonus Pool.” In the event that any Plan Participant is entitled to payment of an amount under the Amended Bonus Plan for the portion of the year in which such individual’s termination occurs, such amount will be paid in the form of cash and will be equal to a percentage of the Termination Bonus Pool corresponding to such individual’s allocated percentage of the Bonus Pool.
Under the terms of the Amended Bonus Plan the Company accrued $1.2 million for the year ended December 31, 2021 and $20,500 for the year ended December 31, 2020.