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Note 1 - Presentation of Interim Information
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May 31, 2012
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| Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] |
NOTE
1 – PRESENTATION OF INTERIM INFORMATION
The
May 31, 2012 balance sheet, the statements of operations for
the three and nine months ended May 31, 2012 and 2011, and
the statements of cash flows for the nine months ended May
31, 2012 and 2011, 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 May 31, 2012, 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 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 May 31, 2012 or August 31, 2011. The Company
maintains its cash balances at a high quality financial
institution in accounts which are federally insured.
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. At no time during the three and
nine months ended May 31, 2012, 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 May
31, 2012 and August 31, 2011. The Company has
accumulated net unrealized losses totaling approximately $200
and $2,900 as of May 31, 2012 and August 31, 2011,
respectively. These securities include only
federally insured certificates of deposit. The
unrealized losses at May 31, 2012 and August 31, 2011 were
the result of changes in interest rates in the market.
Notes
Receivable and Construction Proceeds Receivable
The
amounts reported on the balance sheets for the construction
proceeds receivable approximate fair value as it bears
interest at a rate which is comparable to current market
rates.
The
fair value of the Note Receivable – related party is
not practical to estimate due to the related party nature of
the underlying transaction.
Long-term
Financial Liabilities
The
Comprehensive Amendment Agreement No. 1 (the
“CAA” as further described 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
participating interest and contingent portions of the CAA do
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. A 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 and nine
months ended May 31, 2012 or 2011.
During
the three and nine months ended May 31, 2012, the Company
allocated farm revenue of $47,400 and $142,300, respectively,
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 12 and 36 water
taps, respectively. 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.
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 $873,000 and
$969,000 during the three months ended May 31, 2012 and 2011,
respectively. The Company imputed interest of $2.6
million and $2.9 million during the nine months ended May 31,
2012 and 2011, respectively.
At
May 31, 2012, there remain 19,433 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 May 31,
2012 and 2011, respectively. The Company
recognized $10,700 of water tap fee revenues during each of
the nine months ended May 31, 2012 and 2011,
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 May 31, 2012
and 2011, respectively. The Company recognized
$31,100 of Special Facilities funding as revenue during each
of the nine months ended May 31, 2012 and 2011,
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 May 31, 2012, the Company has deferred recognition of $1.3
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 and nine months ended May
31, 2012, the Company recognized $104,600 and $319,400 of
income and royalty related to the up-front payments received
pursuant to the O&G Lease,
respectively. During the three and nine months
ended May 31, 2011, the Company recognized approximately
$95,600 of income and royalty.
As
of May 31, 2012 and August 31, 2011, the Company has deferred
recognition of $742,600 and $1,053,500 of income related to
the O&G Lease, respectively, 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 $2,100 and $25,300 of share-based
compensation expense during the three months ended May 31,
2012 and 2011, respectively. The Company
recognized $42,300 and $69,300 of share-based compensation
expense during the nine months ended May 31, 2012 and 2011,
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 May 31, 2012.
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 May 31, 2012, 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 and nine months ended May
31, 2012 and 2011.
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 263,100
and 280,100, common share equivalents were outstanding as of
May 31, 2012 and 2011, respectively.
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. 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 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.
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