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Note 1 - Presentation of Interim Information
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Nov. 30, 2011
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| Note 1 - Presentation of Interim Information Disclosure | ||||||||||||||||||||||||||||||||||||||||||||||
| Note 1 - Presentation of Interim Information |
NOTE
1 - PRESENTATION OF INTERIM INFORMATION
The
November 30, 2011 balance sheet, the statements of operations for
the three months ended November 30, 2011 and 2010, and the
statements of cash flows for the three months ended November 30,
2011 and 2010, respectively, have been prepared by Pure Cycle
Corporation (the “Company”) and have not been
audited. In the opinion of management, all adjustments, necessary
to present fairly the financial position, results of operations
and cash flows at November 30, 2011, and for all periods
presented have been made appropriately.
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 financial statements be read in conjunction
with the financial statements and notes thereto included in the
Company's 2011 Annual Report on Form 10-K (the “2011 Annual
Report”) filed with the Securities and Exchange Commission
(the “SEC”) on November 14, 2011. The
results of operations for interim periods presented are not
necessarily indicative of the operating results for the full
fiscal year. The August 31, 2011 balance sheet was
taken directly from the Company’s audited financial
statements.
Use
of Estimates. The preparation of financial
statements in conformity 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 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. The Company considers all
highly liquid instruments with original maturities of three
months or less when acquired, to be cash
equivalents. The Company had no cash equivalents at
November 30, 2011 or August 31, 2011. The Company
maintains its cash balances at a high quality financial
institution in accounts which are federally
insured. At November 30, 2011, the Company’s
main operating account exceeded federally insured limits by
$247,000.
Financial
Instruments – Concentration of Credit Risk and Fair
Value. Financial instruments that potentially
subject the Company to concentrations of credit risk consist
primarily of cash equivalents and marketable securities. The
Company places its cash with high credit-quality financial
institutions. At no time during the three months ended November
30, 2011, did the Company’s marketable securities exceed
federally insured limits. From time-to-time the Company places
its cash in money market instruments, commercial paper
obligations, corporate bonds and US 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 instruments for which it is
practicable to estimate that value.
Current
Assets and Liabilities
The
amounts reported on the balance sheets for cash and cash
equivalents, trade receivables, and trade payables approximate
their fair values because of the short maturity of these
instruments.
The
amounts reported on the balance sheets for marketable securities
are the fair values of the instruments as reported by the
financial institutions where the funds are held at November 30,
2011 and August 31, 2011. The Company has accumulated
net unrealized losses totaling $500 and $2,900 as of November 30,
2011 and August 31, 2011, respectively. These
securities include only federally insured certificates of deposit
and the unrealized losses are a result of changes in interest
rates in the market.
Notes
Receivable and Construction Proceeds Receivable
The
amounts reported on the balance sheets for the Company’s
notes receivable and construction proceeds receivable approximate
their fair values as they bear interest at rates which are
comparable to current market rates.
Long-term
Financial Liabilities
The
Comprehensive Amendment Agreement No. 1 (the “CAA” as
defined in Note 4 below) is comprised of a recorded balance and
an off-balance sheet or “contingent”
obligation. The amount payable is a fixed amount but
is repayable only upon the sale of “Export Water”
(defined in Note 4 to the 2011 Annual Report). Because
of the uncertainty of the sale of Export Water, the Company has
determined that the contingent portion of the CAA does not have a
determinable fair value.
The
recorded balance of the “Tap Participation Fee”
liability (as described below and in Note 4) is its estimated
fair value determined by projecting new home development in the
Company’s targeted service area over an estimated
development period.
Tap
Participation Fee. This note should be read in conjunction
with Note 4 below.
Pursuant
to the Asset Purchase Agreement (the “Arkansas River
Agreement”) dated May 10, 2006, the Company is obligated to
pay High Plains A&M, LLC (“HP A&M”) a defined
percentage of a defined number of water tap fees the Company
receives after the date of the Arkansas River
Agreement. The Tap Participation Fee is due and
payable once the Company has sold a water tap and received the
consideration due for such water tap. The Company did not sell
any water taps during the three months ended November 30, 2011 or
2010.
The
Company imputes interest expense on the unpaid Tap Participation
Fee using the effective interest method over an estimated period
which is utilized in the valuation of the liability. The Company
imputed interest of $851,400 and $940,000 during the three months
ended November 30, 2011 and 2010, respectively.
During
the three months ended November 30, 2011, the Company allocated
$47,400 to the Tap Participation Fee liability and to additional
paid in capital (due to HP A&M being deemed a related
party). This is the equivalent of 11 water
taps. The allocation was made pursuant to the Arkansas
River Agreement and was based on the “Net Revenues”
(defined in Note 4 below) earned by HP A&M related to the
farm leasing operations which are described in greater detail in
Note 4 to the 2011 Annual Report.
At
November 30, 2011, there remain 19,458 water taps subject to the
Tap Participation Fee.
Revenue
Recognition. The Company’s revenue
recognition policies have not changed since August 31, 2011, and
are more fully described in Note 2 to the 2011 Annual
Report.
In
August 2005, the Company entered into the Water Service Agreement
(the “County Agreement”) with Arapahoe County (the
“County”). In fiscal 2006, the Company
began recognizing water tap fees as revenue ratably over the
estimated service period upon completion of the “Wholesale
Facilities” (defined in the 2011 Annual Report) constructed
to provide service to the County. The Company
recognized $3,600 of water tap fee revenues during each of the
three months ended November 30, 2011 and 2010,
respectively. The water tap fees to be recognized over
this period are net of the royalty payments to the State of
Colorado Board of Land Commissioners (the “Land
Board”) and amounts paid to third parties pursuant to the
CAA as further described in Note 4 below.
The
Company recognized $10,400 of “Special Facilities”
(defined in the 2011 Annual Report) funding as revenue during
each of the three months ended November 30, 2011 and 2010,
respectively. This is the ratable portion of the
Special Facilities funding proceeds received from the County
pursuant to the County Agreement as more fully described in Note
4 to the 2011 Annual Report.
As
of November 30, 2011, the Company has deferred recognition of
$1.4 million 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 to the 2011 Annual Report) are
shown net of the royalties to the Land Board and the amounts
retained by the Rangeview Metropolitan District (the
“District”).
Oil
and Gas Lease Payments. As further described in
Note 2 to the 2011 Annual Report, on March 10, 2011, the Company
entered into a Paid-Up Oil and Gas Lease (the “O&G
Lease”) and a Surface Use and Damage Agreement (the
“Surface Use Agreement”) with Anadarko E&P
Company, L.P. (“Anadarko”) a wholly owned subsidiary
of Anadarko Petroleum Company. Pursuant to the O&G
Lease, during the year ended August 31, 2011, the Company
received up-front payments of $1,243,400 from Anadarko for the
purpose of exploring for, developing, producing and marketing oil
and gas on approximately 634 acres of mineral estate owned by the
Company at its Sky Ranch property (described in Note 4 to the
2011 Annual Report). The Company began recognizing the
up-front payments from Anadarko as income on a straight-line
basis over three years (the initial term of the O&G Lease) on
March 10, 2011. During the three months ended November
30, 2011 and 2010, the Company recognized $103,600 and $0 of
income related to the up-front payments received pursuant to the
O&G Lease, respectively.
As
of November 30, 2011, the Company has deferred recognition of
$949,900 of income related to the O&G Lease, which will be
recognized into income ratably through February 2014.
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. The costs
are depreciated on a straight-line basis over the estimated
useful lives of the water and wastewater systems, up to thirty
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 water assets that are being utilized on the basis of
units produced 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
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 allowed 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, at this
time, the granting and exercise of stock options has no impact on
the income tax provisions.
The
Company recognized $18,800 and $21,400 of share-based
compensation expense during the three months ended November 30,
2011 and 2010, 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 does not have any significant
unrecognized tax benefits as of November 30, 2011.
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 2009 through fiscal 2011. The
Company does not believe there will be any material changes in
its unrecognized tax positions over the next twelve
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 November 30, 2011, 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 November 30, 2011 and
2010.
Loss
per Common Share
. Loss
per common share is computed by dividing net loss by the weighted
average number of shares outstanding during each period. Common
stock options and warrants aggregating 275,100 and 262,600,
common share equivalents as of November 30, 2011 and 2010,
respectively, and 1.9 million shares underlying the Convertible
Note – Related Party (defined in Note 4 to the 2011 Annual
Report), prior to conversion on January 11, 2011, have been
excluded from the calculation of loss per common share as their
effect is anti-dilutive.
Comprehensive
Loss. In addition to net loss, comprehensive loss includes
the unrecognized changes in the fair value of marketable
securities that are classified as available-for-sale as noted in
the following table:
Recently
Issued Accounting Pronouncements. The Company
continually assesses any new accounting pronouncements to
determine their applicability. Where 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 financial statements and
assures that there are proper controls in place to ascertain that
the Company’s financials properly reflect the
change. A variety of proposed or otherwise potential
accounting standards are currently under study by
standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed
standards, the Company has not determined whether implementation
of such proposed standards would be material to the
Company’s financial statements. New
pronouncements assessed by the Company recently are discussed
below:
In
June 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2011-05,
Comprehensive
Income (Topic 220) –
Presentation
of Comprehensive Income
(“ASU
2011-05”). ASU 2011-05 requires entities
to present net income and other comprehensive income in either a
single continuous statement or in two separate, but consecutive,
statements of net income and other comprehensive income. ASU
2011-05 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011 (September 1, 2012
for the Company). The Company is assessing the impact
of ASU 2011-05 but it does not expect the adoption of ASU 2011-05
to have a material impact on its financial statements.
Reclassifications. Certain
amounts in the November 30, 2010 financial statements have been
reclassified to conform to the current presentation.
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