Pure Cycle Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

2. FAIR VALUE MEASUREMENTS

2. FAIR VALUE MEASUREMENTS

6 Months Ended

Feb. 28, 2018

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. The Company uses 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 where within the fair value hierarchy the measurement falls.

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had no Level 1 assets or liabilities as of February 28, 2018 or August 31, 2017.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had 17 and 56 Level 2 assets as of February 28, 2018 and August 31, 2017, respectively, which consist of certificates of deposit, U.S. Treasury bills and U.S. Treasury notes.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had one Level 3 liability, the contingent portion of the CAA, as of February 28, 2018 and August 31, 2017. The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 4 – Long-Term Obligations and Operating Lease).

The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.

Level 2 Asset – Available for Sale Securities. The Company’s available for sale securities are the Company’s only financial asset measured at fair value on a recurring basis. The fair value of the available for sale 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 and U.S. Treasury bills and notes.

The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems, land held for sale, and other long-lived assets. See Note 3 – Water and Land Assets below.

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of February 28, 2018:

					Fair Value Measurement Using:
			Cost / Other		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Accumulated Unrealized Gains and
	Fair Value		Value		(Level 1)		(Level 2)		(Level 3)		(Losses)
Certificates of deposit	$	1,246,500	$	1,250,000	$	-	$	1,246,500	$	-	$	(3,500	)
U.S. treasuries		15,885,900		15,862,300		-		15,885,900		-		23,600
Subtotal	$	17,132,400	$	17,112,300	$	-	$	17,132,400	$	-	$	20,100
Long-term investments		1,427,700		1,428,200		-		1,427,700		-		(500	)
Total	$	18,560,100	$	18,540,500	$	-	$	18,560,100	$	-	$	19,600

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2017:

					Fair Value Measurement Using:
			Cost / Other		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Accumulated Unrealized Gains and
	Fair Value		Value		(Level 1)		(Level 2)		(Level 3)		(Losses)
Certificates of deposit	$	12,673,700	$	12,694,500	$	-	$	12,673,700	$	-	$	(20,800	)
U.S. treasuries		7,381,700		7,372,000		-		7,381,700		-		9,700
Subtotal	$	20,055,400	$	20,066,500	$	-	$	20,055,400	$	-	$	(11,100	)
Long-term investments		188,000		188,000		-		188,000		-		-
Total	$	20,243,400	$	20,254,500	$	-	$	20,243,400	$	-	$	(11,100	)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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