| PRESENTATION OF INTERIM INFORMATION | The
February 29, 2016 consolidated balance sheet, the consolidated statements of operations and other comprehensive income (loss)
for the three and six months ended February 29, 2016 and February 28, 2015, the consolidated statement of shareholders' equity
for the six months ended February 29, 2016, and the consolidated statements of cash flows for the six months ended February 29,
2016 and February 28, 2015 have been prepared by Pure Cycle Corporation (the "Company") and have not been audited. The
unaudited consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present
fairly the financial position, results of operations and cash flows at February 29, 2016, and for all periods presented. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's
2015 Annual Report on Form 10-K (the "2015 Annual Report") filed with the Securities and Exchange Commission (the "SEC")
on November 9, 2015. The results of operations for interim periods presented are not necessarily indicative of the operating results
for the full fiscal year. The August 31, 2015 balance sheet was taken from the Company's audited financial statements and was
modified to reflect the discontinued operations presentation of the Company's agricultural segment. Use
of Estimates The
preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Cash
and Cash Equivalents Cash
and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company's
cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution. At various times
during the three and six months ended February 29, 2016, the Company's main operating account exceeded federally insured
limits. The Company has never suffered a loss due to such excess balance. Investments Management
determines the appropriate classification of its investments in certificates of deposit and debt and equity securities at the
time of purchase and reevaluates such determinations each reporting period. Certificates
of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. The Company has $10,018,700 of investments classified as held-to-maturity at February 29, 2016 which
represent certificates of deposit with maturity dates after February 28, 2017. Debt securities for which the Company does not
have the positive intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity
securities. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value on such
securities are recorded as a component of Accumulated comprehensive income. Concentration of Credit Risk and Fair Value Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents
and available for sale securities. From time to time, the Company places its cash in money market instruments, commercial paper
obligations, corporate bonds and U.S. government treasury obligations. To date, the Company has not experienced significant losses
on any of these investments. The
following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable
to estimate that value. Cash
and Cash Equivalents Trade
Accounts Receivable Investments
Fair
Value Measurements Accounts
Payable Long-Term
Financial Liabilities Water and Land Assets Water
and Land Assets Long-Term Obligations and Operating Lease Participating Interests in Export Water Supply Notes
Receivable Related Parties Off-Balance
Sheet Instruments Long-Term Obligations and Operating Lease Participating Interests in Export Water Supply Revenue
Recognition Wholesale
Water and Wastewater Fees The
Company recognizes wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts
retained by the District. The Company recognized $10,700 and $13,200 of wastewater treatment fees during the three months ended
February 29, 2016 and February 28, 2015, respectively. The Company recognized $21,000 and $24,900 of wastewater treatment fees
during the six months ended February 29, 2016 and February 28, 2015, respectively. Costs of delivering water and providing wastewater
services to customers are recognized as incurred. Tap
and Construction Fees Long-Term Obligations and Operating Lease The
Company recognized $10,400 and $20,800 of "Special Facilities" (defined in Part I, Item 1 of the 2015 Annual
Report) funding as revenue during each of the three and six months ended February 29, 2016 and February 28, 2015, respectively.
This is the ratable portion of the Special Facilities funding proceeds received from water agreements as more fully described
in Note 2 Summary of Significant Accounting Policies As
of February 29, 2016, and August 31, 2015, the Company has deferred recognition of approximately $1,139,200 and $1,167,100, respectively,
of water tap and construction fee revenue from the County, which will be recognized as revenue ratably over the estimated useful
accounting life of the assets constructed with the construction proceeds as described above. Royalty
and Other Obligations Revenues
from the sale of Export Water are shown net of royalties payable to the Land Board. Revenues from the sale of water on the "Lowry
Range" (described in Note 4 Water and Land Assets Oil
and Gas Lease Payments As
further described in Note 2 Summary of Significant Accounting Policies Water and Land Assets As
of February 29, 2016 and August 31, 2015, the Company has deferred recognition of $56,900 and $379,800, respectively, of income
related to the O&G Lease and the Rangeview Lease, which will be recognized into income ratably through March 2016 and July
2017, respectively. During
the three months ended February 28, 2015, two wells were drilled within the Company's mineral interest. Beginning in March 2015,
both wells were placed into service and began producing oil and gas and accruing royalties to the Company. In May 2015, certain
gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties
attributable to gas production. During the three and six months ended February 29, 2016, the Company received $72,500 and $194,600,
respectively, in royalties attributable to these two wells. Long-Lived
Assets The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by the eventual use of the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Capitalized
Costs of Water and Wastewater Systems and Depletion and Depreciation of Water Assets Costs
to construct water and wastewater systems that meet the Company's capitalization criteria are capitalized as incurred, including
interest, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes
design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting
costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being
utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in
the water decrees. Share-Based
Compensation The
Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based
compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation
costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative
transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating
the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets,
the granting and exercise of stock options has no impact on the income tax provisions. The Company recognized $55,200 and $63,800
of share-based compensation expense during the three months ended February 29, 2016 and February 28, 2015, respectively. The Company
recognized $108,900 and $132,600 of share-based compensation expense during the six months ended February 29, 2016 and February
28, 2015, respectively. Income
Taxes The
Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions, including any
potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized
tax benefits as of February 29, 2016. The
Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject
to examination are fiscal year 2013 through fiscal year 2015. The Company does not believe there will be any material changes
in its unrecognized tax positions over the next 12 months. The
Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax
expense. At February 29, 2016, the Company did not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized during the three or six months ended February 29, 2016 or February 28, 2015. Discontinued
Operations In
August 2015, the Company sold its Arkansas River water and land properties. Pursuant to the terms of the purchase and sale agreement,
the Company continued to manage and receive the lease income until December 31, 2015. The operating results and the assets
and liabilities of the discontinued operations, which formerly comprised the agricultural segment, are presented separately in
the Company's Consolidated Financial Statements. Summarized financial information for the discontinued agricultural business is
shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued
operation.
Discontinued
Operations Income Statement
Three
Months Ended Six
Months Ended
February
29, 2016 February
28, 2015 February
29, 2016 February
28, 2015
Farm
revenues $ 63,743 $ 284,530 $ 275,991 $ 548,343
Farm
expenses (17,736 ) (20,384 ) (33,368 ) (46,870 )
Gross
profit 46,007 264,146 242,623 501,473
General
and administrative expenses 74,648 120,061 213,156 233,300
Operating
(loss) profit (28,641 ) 144,085 29,467 268,173
Interest
expense - 78,683 - 143,135
Interest
imputed on the Tap Participation
Fee
payable to HP A&M - - - 23,816
Income
(loss) from discontinued operations $ (28,641 ) $ 65,402 $ 29,467 $ 101,222 The
individual assets and liabilities of the discontinued agricultural operation are combined in the captions "Assets of discontinued
operation" and "Liabilities of discontinued operation" in the consolidated Balance Sheet. The carrying amounts
of the major classes of assets and liabilities included part of the discontinued business are presented in the following table:
Discontinued
Operation Balance Sheet
February
29, 2016 August
31, 2015
Assets:
Trade
accounts receivable, net $ 478,886 $ 307,913
Escrow
receivable - 1,342,250
Land
held for sale (*) 450,347 -
Prepaid
expenses - 65,309
Total
assets $ 929,233 $ 1,715,472
Liabilities:
Accounts
payable $ 163,657 $ 25,704
Accrued
liabilities 1,099 90,725
Deferred
revenues - 900
Total
liabilities $ 164,756 $ 117,329
(*)
Land Held for Sale. Income
(Loss) per Common Share Income
(loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during
each period. Common stock options and warrants aggregating 348,100 and 341,100 common share equivalents were outstanding as of
February 29, 2016 and February 28, 2015, respectively, and have been included in the calculation of net income per common share
but excluded from the calculation of loss per common share as their effect is anti-dilutive. Recently
Issued Accounting Pronouncements The
Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a
new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence
of the change to its consolidated financial statements and ensure that there are proper controls in place to ascertain that the
Company's consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are
discussed below: In
March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross
versus Net) Revenue from Contracts with Customers In
April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of
an Entity |
