| PRESENTATION OF INTERIM INFORMATION | The
February 28, 2018 consolidated balance sheet, the consolidated statements of operations and comprehensive income (loss) for the
three and six months ended February 28, 2018 and 2017, the consolidated statement of shareholders’ equity for the six months
ended February 28, 2018, and the consolidated statements of cash flows for the six months ended February 28, 2018 and 2017 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 28, 2018, and for all periods presented. As described in Revenue Recognition
Recently Issued Accounting Pronouncements Revenue from Contracts with Customers (Topic 606) 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
Annual Report on Form 10-K for the fiscal year ended August 31, 2017 (the “2017 Annual Report”) filed with the Securities
and Exchange Commission (the “SEC”) on November 15, 2017. The results of operations for interim periods presented
are not necessarily indicative of the operating results for the full fiscal year. The August 31, 2017 balance sheet was derived
from the Company’s audited consolidated financial statements. 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 months ended February 28, 2018, 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 re-evaluates 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 $1,428,000 of investments classified as held-to-maturity at February 28, 2018, which
represent certificates of deposit and a U.S. Treasury note with maturity dates after February 28, 2019. Securities that the Company
does not have the positive intent or ability to hold to maturity, including certificates of deposit, debt securities and any investments
in equity securities, are classified as available-for-sale. Securities classified as available-for-sale are marked-to-market at
each reporting period. Changes in value of such securities are recorded as a component of Accumulated other comprehensive income
(loss) 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 investments. From time to time, the Company places its cash in money market instruments, certificates of deposit 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 Related Party Transactions Off-Balance
Sheet Instruments – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply Revenue
Recognition The
Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive
income (loss). Comparative
results for the three and six months ended February 28, 2018 and 2017 differ due to the adoption by the Company of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) As
described in Recently Issued Accounting Pronouncements The
Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance
of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods. The most significant impact of the standard relates to the Company’ accounting for tap fees
and special facility or construction fees, which revenues are expected to be recognized in earlier periods under the new revenue
standard. Revenue recognition related to the Company’s water and wastewater usage fees, consulting fees and oil and gas
royalty or lease payments will remain substantially unchanged. 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 Rangeview. The Company recognized $9,300 and $11,200 of wastewater treatment fees during the three months ended February
28, 2018 and 2017, respectively. The Company recognized $20,500 and $23,500 of wastewater treatment fees during the six months
ended February 28, 2018 and 2017, respectively. Costs of delivering water and providing wastewater services to customers are recognized
as incurred. Tap
Fees The
Company recognizes water tap fees as revenue at the time the Company grants a right for the customer to tap into the water service
line to obtain water service. The Company recognized $0 and $3,600 of water tap fee revenues during the three months ended February
28, 2018 and 2017, respectively. The Company recognized $49,900 and $7,100 of water tap fee revenues during the six months ended
February 28, 2018 and 2017, respectively. The water tap fees recognized during these periods are net of the royalty payments to
the Land Board and amounts paid to third parties pursuant to the CAA as further described in Note 4 – Long-Term
Obligations and Operating Lease The
Company recognizes construction fees, including fees received to construct “Special Facilities” (defined in Part I,
Item 1 of the 2017 Annual Report), on a percentage-of-completion basis as the construction is completed. Special Facilities are
facilities that enable water to be delivered to a single customer. Management has determined that Special Facilities are separate
and distinct performance obligations. The Company recognized $10,400 and $20,800 of Special Facilities funding as revenue during
the three and six months ended February 28, 2017, respectively. No Special Facilities revenue has been recognized during the three
or six months ended February 28, 2018. The 2017 amounts are the ratable portion of the Special Facilities funding, or construction
fees, received from water agreements as more fully described in Note 2 – Summary of Significant Accounting
Policies As
of February 28, 2018, and August 31, 2017, the Company has deferred recognition of approximately $0 and $1,055,500, respectively,
of water tap and construction fee revenue. Consulting
Fees Lot
Sales – The
Company sells lots at Sky Ranch pursuant to distinct agreements with each builder. These agreements follow one of two formats.
One format is the sale of a finished lot, whereby the purchaser pays for a finished lot which is ready to build and the payment
is a lump-sum payment upon completion of the finished lot. The Company will recognize revenues from the sale of finished lots
at the time of sale as the transaction cycle will be complete with the delivery of a finished lot and the Company will have no
further obligations. The
Company's second format for the sale of lots is pursuant to a development agreement with builders, whereby the Company will recognize
revenues in stages that include (i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title
to individual lots), (ii) a second payment at the completion of certain infrastructure milestones, and (iii) final payment at
the delivery of the finished lot. Under the development agreement format, the Company will defer the receipt of revenues from
the first two milestones and recognize the full revenue from the sale of the lot once the Company completes all contractual commitments
concurrent with the final delivery of the finished lot. Royalty
and Other Obligations Revenues
from the sale of Export Water are shown gross 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 Other Income On
October 5, 2017, the Company entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP, for the purpose of exploring
for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry
Range (the “Bison Lease”). Pursuant to the Bison Lease, the Company received an up-front payment of $167,200, which
will be recognized as income on a straight-line basis over three years (the term of the Bison Lease). The Company recognized $13,900
and $23,200 during the three and six months ended February 28, 2018, respectively, of lease income related to the up-front payment
received pursuant to the Bison Lease. As of February 28, 2018, the Company has deferred recognition of $144,000 of income related
to the Bison Lease which will be recognized into income ratably through September 2020. 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. Capitalized
Lot Development Costs and Public Improvement Loans at Sky Ranch Capitalized
lot development costs at Sky Ranch are costs incurred to construct lots at Sky Ranch that meet the Company's capitalization criteria
for improvements to a lot and are capitalized as incurred, including interest. The Company capitalizes certain legal, engineering,
design, permitting, land acquisition, and construction costs related to the development of lots at Sky Ranch. We use the
specific identification method for purposes of accumulating land development costs and allocate costs to each lot to determine
the cost basis for each lot sale. We will record all land cost of sales when a lot is closed on a lot-by-lot basis. Additionally,
the Company will fund certain costs related to the development of public improvements, such as drainage improvements, storm water
improvements, roadways, curb and gutter improvements, parks and open spaces, etc. These costs are incurred by the CAB and
funds for these improvements are advanced by the Company to the CAB under a Project Funding and Reimbursement Agreement which
acts as a loan of funds from the Company to the CAB and earns interest at the rate of 6%. As homes are sold, the Sky Ranch
Metropolitan Districts will develop assessed value in the community and levy mills against the assessed value to generate property
tax revenues to the Sky Ranch Metropolitan Districts that can be used to fund the CAB to repay the Company's loan advances.
These loan advances are recorded as a note receivable and accrue interest from the time of the loan. 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 $77,400 and $64,500
of share-based compensation expense during the three months ended February 28, 2018 and 2017, respectively, and $157,600 and $104,500
of share-based compensation expense during the six months ended February 28, 2018 and 2017, 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 28, 2018. Due
to the complexities involved in accounting for the recently enacted Tax Cuts and Jobs Act (the "Tax Act"), the SEC’s
Staff Accounting Bulletin No. 118 (“SAB 118”) requires that the Company include in its financial statements the reasonable
estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Pursuant to SAB 118,
the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording
of the related tax impacts. The final impact on the Company from the Tax Act may differ from the aforementioned estimates due
to the complexity of calculating and supporting with primary evidence, changes in interpretations of the Tax Act, future legislative
action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations
in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the reasonable estimate.
The Company’s deferred tax asset and full valuation allowance was decreased by approximately $1 million as a result of the
decreased corporate tax rate. The Company will continue to evaluate the impact of the Tax Act and will record any resulting
tax adjustments during 2018. 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 2014 through fiscal year 2017. 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 28, 2018, 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 months ended February 28, 2018 or 2017. Discontinued
Operations In
August 2015, the Company sold substantially all of 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 associated with such properties 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 February 28, Six
Months Ended February 28,
2018 2017 2018 2017
Farm revenues $ 840 $ 6,034 $ 1,421 $ 6,034
Farm expenses - - - -
Gross profit 840 6,034 1,421 6,034
General and administrative expenses - 17,104 - 36,730
Operating
profit (loss) 840 (11,070 ) 1,421 (30,696 )
Finance charges - 8,421 - 9,367
Income (loss) from discontinued operations $ 840 $ (2,649 ) $ 1,421 $ (21,329 ) The
Company anticipates continued expenses through calendar 2018 related to the discontinued operations. The Company will continue
to incur expenses (including property taxes) related to the remaining agricultural land the Company continues to own and for the
purpose of collecting outstanding receivables. The
individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued
operations held for sale” and “Liabilities of discontinued operations” in the consolidated balance sheet. The
carrying amounts of the major classes of assets and liabilities included as part of the discontinued business are presented in
the following table:
Discontinued
Operations Balance Sheet
February
28, 2018 August
31, 2017
Assets:
Trade accounts receivable $ 91,100 $ 110,700
Land held for
sale (*) 450,600 450,600
Total assets $ 541,700 $ 561,300
Liabilities:
Accrued liabilities $ 8,600 $ 11,200
Total liabilities $ 8,600 $ 11,200 (*)
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 535,500 and 480,500 common share equivalents were outstanding as of
February 28, 2018 and 2017, 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
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). In
January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and
Financial Liabilities (Topic 825) In
August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers Topic 606 Revenue Recognition (Topic 605) The
Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance
of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods. The
cumulative effect of the changes made to the Company’s consolidated September 1, 2017 balance sheet for the adoption of
ASU 2014-09 were as follows:
Balance
at Adjustments Balance
at
August
31, 2017 Due
to ASU 2014-09 September
1, 2017
Balance Sheet
Assets
Deferred
tax assets (Deferred revenue) $ 316,400 $ (316,400 ) $ -
Deferred tax assets
- valuation allowance (Deferred revenue) (316,400 ) 316,400 -
Liabilities
Deferred revenues $ 55,800 $ (55,800 ) $ -
Deferred revenues, less
current portion 999,249 (999,249 ) -
Equity
Accumulated deficit $ (103,993,900 ) $ 1,055,049 $ (102,938,851 ) In
accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s consolidated
statements of operations and comprehensive income (loss) and balance sheet was as follows:
For
the Six Months Ended February 28, 2018
Amounts
that would have been reported Effect
of Change
As
Reported under
ASC 605 Higher/(Lower)
Income statement
Revenues
Special facility fees $ - $ 20,754 $ (20,754 )
Water tap fees 49,948 57,095 (7,147 )
Net
income $ 3,551 $ 31,452 $ (27,901 )
As
of February 28, 2018
Amounts
that would have been reported Effect
of Change
As
Reported under
ASC 605 (1) Higher/(Lower)
Balance Sheet
Liabilities
Deferred revenues $ - $ 55,800 $ (55,800 )
Deferred revenues, less current portion - 999,249 (999,249 )
Deferred oil and gas lease payment (1) 55,733 55,733 -
Deferred oil and gas lease payment, less
current portion 88,244 88,244 -
Equity
Accumulated
deficit $ (102,935,300 ) $ (103,962,448 ) $ 1,027,148
(1) Inclusive
of the Bison Lease deferred oil and gas lease payment and water tap and construction fee deferred revenues as described in
the 2017 Annual Report. Revenue
recognition related to the Company’s water and wastewater usage, consulting revenues and oil and gas revenues will remain
substantially unchanged. The most significant impact of the standard relates to the Company’s accounting for water and wastewater
tap fees and special facility/construction fees, which revenues will be recognized in earlier periods when performance obligations
are complete under the new revenue standard. |
