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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 000-08814

GRAPHIC

PURE CYCLE CORPORATION

(Exact name of registrant as specified in its charter)

Colorado

84-0705083

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

34501 E. Quincy Avenue, Bldg. 34, Watkins, CO

80137

(Address of principal executive offices)

(Zip Code)

(303) 292 – 3456

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock 1/3 of $.01 par value

PCYO

The NASDAQ Stock Market

(Title of each class)

(Trading Symbol(s))

(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 1, 2021:

Common stock, 1/3 of $.01 par value

23,910,133

(Class)

(Number of Shares)

PURE CYCLE CORPORATION

INDEX TO MAY 31, 2021 FORM 10-Q

Page

PART I. FINANCIAL INFORMATION

1

Item 1. Condensed Consolidated Financial Statements

1

Condensed Consolidated Balance Sheets: May 31, 2021 (unaudited) and August 31, 2020

1

Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited): For the three and nine months ended May 31, 2021 and 2020

2

Condensed Consolidated Statements of Shareholders’ Equity (unaudited): For the three and nine months ended May 31, 2021 and 2020

3

Condensed Consolidated Statements of Cash Flows (unaudited): For the nine months ended May 31, 2021 and 2020

5

Notes to Condensed Consolidated Financial Statements

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34

Item 4. Controls and Procedures

34

PART II. OTHER INFORMATION

36

Item 6. Exhibits

36

SIGNATURES

37

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

    

May 31, 2021

(unaudited)

    

August 31, 2020

(In thousands, except share and

per share amounts)

ASSETS:

Current assets:

 

  

 

  

Cash, cash equivalents and restricted cash

$

19,796

$

21,797

Trade accounts receivable, net

 

1,933

 

1,124

Prepaid expenses and other assets

 

528

 

1,001

Land development inventories:

 

 

Land development - Phase 1

481

Land development - Phase 2

172

Public improvement reimbursables - Phase 2

444

Income taxes receivable

 

 

1,588

Total current assets

 

22,873

 

25,991

Investments in water and water systems, net

 

55,140

 

55,087

Land and mineral interests

 

5,625

 

4,915

Other assets

 

2,390

 

2,042

Notes receivable – related parties, including accrued interest:

 

 

Public improvement reimbursables - Phase 1

21,316

Other

1,174

1,079

Long-term land investment

 

451

 

451

Operating leases - right of use assets, less current portion

 

141

 

196

Total assets

$

109,110

$

89,761

LIABILITIES:

Current liabilities:

Accounts payable

$

208

$

180

Accrued liabilities

 

1,070

 

1,391

Accrued liabilities - related parties

 

634

 

1,212

Income taxes payable

3,695

Deferred lot sale revenues

 

550

 

1,635

Deferred oil and gas lease payment and water sales payment

 

253

 

1,800

Total current liabilities

 

6,410

 

6,218

Deferred oil and gas lease payment and water sales payment, less current portion

 

22

 

165

Participating interests in export water supply

 

325

 

328

Deferred tax liability

 

1,509

 

886

Lease obligations - operating leases, less current portion

 

58

 

120

Total liabilities

 

8,324

 

7,717

Commitments and contingencies

SHAREHOLDERS’ EQUITY:

Preferred stock:

Series B – par value $0.001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)

 

 

Common stock:

Par value 1/3 of $.01 per share, 40 million shares authorized; 23,910,133 and 23,856,098 shares outstanding, respectively

 

80

 

80

Additional paid-in capital

 

173,393

 

172,927

Accumulated other comprehensive income

 

 

Accumulated deficit

 

(72,687)

 

(90,963)

Total shareholders’ equity

 

100,786

 

82,044

Total liabilities and shareholders’ equity

$

109,110

$

89,761

See accompanying Notes to Condensed Consolidated Financial Statements

1

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

    

2021

    

2020

    

2021

    

2020

(In thousands, except per share amounts)

Revenues:

 

  

 

  

  

 

  

Metered water usage from:

Municipal customers

$

188

$

98

$

429

$

238

Oil and gas operations

 

22

 

15

 

1,804

 

72

Wastewater treatment fees

 

51

 

22

 

144

 

62

Water and wastewater tap fees

 

1,856

 

1,005

 

4,522

 

3,850

Lot sales

 

445

 

696

 

3,316

 

11,503

Project management fees - recognized

23

1,571

Special facility projects and other

 

81

 

14

 

487

 

104

Total revenues

 

2,666

 

1,850

 

12,273

 

15,829

Expenses:

Water service operations

 

(316)

 

(95)

 

(1,074)

 

(556)

Wastewater service operations

 

(102)

 

(62)

 

(258)

 

(126)

Land development construction costs

 

(99)

 

(556)

 

(2,087)

 

(10,436)

Depletion and depreciation

 

(358)

 

(386)

 

(1,077)

 

(988)

Other

 

(65)

 

(7)

 

(453)

 

(34)

Total cost of revenues

 

(940)

 

(1,106)

 

(4,949)

 

(12,140)

Gross profit

 

1,726

 

744

 

7,324

 

3,689

General and administrative expenses

 

(1,325)

 

(801)

 

(3,753)

 

(2,639)

Depreciation

 

(73)

 

(86)

 

(233)

 

(266)

Operating income (loss)

 

328

 

(143)

 

3,338

 

784

Other income:

Recognition of public improvement reimbursables including interest income - related party

284

19,888

Oil and gas royalty income, net

 

97

 

74

 

248

 

613

Oil and gas lease income, net

 

48

 

62

 

148

 

185

Interest income from investments

15

24

45

162

Other

 

10

 

19

 

30

 

19

Reimbursement of construction costs - related party

 

 

 

485

 

6,276

Income from operations before income taxes

 

782

 

36

 

24,182

 

8,039

Income tax expense

 

(158)

 

(9)

 

(5,906)

 

(1,975)

Net income

$

624

$

27

$

18,276

$

6,064

Unrealized holding losses

 

 

 

 

(4)

Total comprehensive income

$

624

$

27

$

18,276

$

6,060

Earnings per common share:

Basic

$

0.03

$

$

0.77

$

0.25

Diluted

$

0.03

$

$

0.76

$

0.25

Weighted average common shares outstanding:

Basic

 

23,907

 

23,853

 

23,885

 

23,842

Diluted

 

24,184

 

24,053

 

24,104

 

24,071

See accompanying Notes to Condensed Consolidated Financial Statements

2

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

Three Months Ended May 31, 2021

Accumulated

    

Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

Total

(In thousands)

February 28, 2021 balance:

 

433

 

$

 

23,888

 

$

80

 

$

173,254

 

$

 

$

(72,766)

 

$

100,568

Prior period adjustment

 

 

 

 

 

 

(545)

(545)

Stock option exercises

22

48

48

Stock granted for services

Share-based compensation

 

 

 

 

 

91

 

 

 

91

Net income

 

 

 

 

 

 

 

624

 

624

May 31, 2021 balance:

 

433

$

 

23,910

$

80

$

173,393

$

$

(72,687)

$

100,786

Three Months Ended May 31, 2020

Accumulated

    

Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

Total

(In thousands)

February 29, 2020 balance:

 

433

 

$

 

23,852

 

$

79

 

$

172,749

 

$

 

$

(91,676)

 

$

81,152

Stock option exercises

2

4

4

Stock granted for services

Share-based compensation

 

 

 

 

 

82

 

 

 

82

Net income

 

 

 

 

 

 

 

27

 

27

May 31, 2020 balance:

 

433

$

 

23,854

$

79

$

172,835

$

$

(91,649)

$

81,265

3

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

Nine Months Ended May 31, 2021

Accumulated

Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Total

(In thousands)

August 31, 2020 balance:

 

433

 

$

 

23,856

 

$

80

 

$

172,927

 

$

 

$

(90,963)

 

$

82,044

Stock option exercises

42

62

62

Stock granted for services

12

136

136

Share-based compensation

 

 

 

 

 

268

 

 

 

268

Net income

 

 

 

 

 

 

 

18,276

 

18,276

May 31, 2021 balance:

 

433

$

 

23,910

$

80

$

173,393

$

$

(72,687)

$

100,786

Nine Months Ended May 31, 2020

Accumulated

    

Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

Total

(In thousands)

August 31, 2019 balance:

 

433

 

$

 

23,827

 

$

79

 

$

172,361

 

$

4

 

$

(97,713)

 

$

74,731

Stock option exercises

15

39

39

Stock granted for services

12

149

149

Share-based compensation

 

 

 

 

 

286

 

 

 

286

Net income

6,064

6,064

Unrealized holding loss on investments

 

 

 

 

 

 

(4)

 

 

(4)

May 31, 2020 balance:

 

433

$

 

23,854

$

79

$

172,835

$

$

(91,649)

$

81,265

See accompanying Notes to Condensed Consolidated Financial Statements

4

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Nine Months Ended

May 31,

May 31,

    

2021

    

2020

(In thousands)

Cash flows from operating activities:

 

  

 

  

Net income

$

18,276

$

6,064

Adjustments to reconcile net income to net cash (used) provided by operating activities:

Depreciation and depletion

1,310

1,254

Share-based compensation expense

 

404

 

435

Deferred income taxes

 

623

 

710

Interest added to receivable from related parties

 

(34)

 

(34)

Proceeds from CAB reimbursement applied to land development inventories

 

 

4,230

Changes in operating assets and liabilities:

Trade accounts receivable

 

(810)

 

454

Prepaid expenses

 

(13)

 

(47)

Land development inventories

 

(131)

 

2,576

Taxes receivable

(40)

Recognition of public improvement reimbursables, including interest

(21,316)

Taxes payable net of taxes receivable

5,283

Accounts payable and accrued liabilities

 

(562)

 

(383)

Deferred revenues

 

(2,778)

 

(61)

Other assets and liabilities

 

(59)

 

46

Net cash provided by operating activities

 

193

 

15,204

Cash flows from investing activities:

Investments in water, water systems and land

 

(2,152)

 

(7,302)

Purchase of property and equipment

 

(101)

 

(526)

Sale and maturities of short-term investments

 

 

6,905

Purchase of short-term investments

 

 

(1,720)

Net cash used by investing activities

 

(2,253)

 

(2,643)

Cash flows from financing activities:

Proceeds from exercise of options

 

62

 

40

Payments to contingent liability holders

 

(3)

 

(4)

Net cash provided by financing activities

 

59

 

36

Net change in cash, cash equivalents and restricted cash

 

(2,001)

 

12,597

Cash, cash equivalents and restricted cash – beginning of period

 

21,797

 

4,478

Cash, cash equivalents and restricted cash – end of period

$

19,796

$

17,075

Cash and cash equivalents

$

19,514

$

17,075

Restricted cash

282

Total cash, cash equivalents and restricted cash

$

19,796

$

17,075

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES

Transfer of land development costs to other assets

$

484

$

Transfer of land development costs to inventory

$

467

$

Changes in Land development inventories included in accounts payable and accrued liabilities

$

613

$

912

Changes in Investments in water, water systems and land included in accounts payable and accrued liabilities

$

298

$

(898)

Income taxes paid

$

$

1,305

See accompanying Notes to Condensed Consolidated Financial Statements

5

PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2021

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The May 31, 2021 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended May 31, 2021 and 2020, the condensed consolidated statements of shareholders’ equity for the three and nine months ended May 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended May 31, 2021 and 2020 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. The unaudited condensed 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 May 31, 2021, 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 the accompanying condensed consolidated financial statements and notes be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 10, 2020. The results of operations for interim periods presented are not necessarily indicative of the operating results expected for the full fiscal year. The August 31, 2020 balance sheet was derived from the Company’s audited consolidated financial statements.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. COVID-19 has delayed the second phase of the Sky Ranch development revenue recognition due to the extended time taken to approve the platted lots through the County Government. Other than the delay of the approval of the platted lots, there has not been a material impact to the Company’s condensed consolidated financial statements as a result of the CARES Act.

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. Estimates are used to account for certain items such as revenue recognition, timing and amount of reimbursable costs and expenses and the associated repayment, costs of revenue for lot sales, share-based compensation, deferred tax asset and liability valuation, depreciation, and the recoverability of long-lived assets. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

During the nine months ended May 31, 2021, the Company revised its estimates to conclude that the reimbursable public improvements, project management revenue and interest income related to the first development phase at Sky Ranch are reasonably assured of payment. Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), the Company was unable to estimate when or if it would receive payment for these items and deferred recognition of them until the cash was received from the Sky Ranch CAB. As a result of an established and growing tax base resulting from the success of the initial filing, added mill levies, and additional unencumbered fees received by the Sky Ranch CAB, the Company believes repayment of the public improvements, payment of the project management fees, and interest income are deemed reasonably assured. Based on this, the Company has recognized these items in the Company’s consolidated financial statements. The timing and amount of these potential payments have been estimated by the Company based on sales and growth trends utilizing current assessed home values and historic growth rates which have been projected to the current and contracted for lot sales through the contractual obligation period.

6

Recently Issued Accounting Pronouncements

The Company continually assesses 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 consequences of the change to its consolidated financial statements and to 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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 was set to be effective for public companies on January 1, 2020; however, the FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, the Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.

NOTE 2 – PRIOR PERIOD ADJUSTMENT

The Company discovered certain errors in the amounts previously reported for the three and six months ended February 28, 2021, which if these errors though immaterial in the given periods, were corrected in the three months ended May 31, 2021, management believes these corrections would have a material impact on the current reported three month consolidated statement of operations, specifically the recognition of Public improvement reimbursables including interest income - related party. The Company’s President and the Chief Financial Officer evaluated the effects of the errors on the consolidated financial statements for the three and six months ended February 28, 2021, which each concluded that the errors were not material to those presented results. Based on this evaluation, the errors did not rise to the level of requiring a restatement of the financial information for the three and six months ended February 28, 2021, contained in the Form 10-Q as previously filed. Accordingly, management has corrected these errors by adjusting opening accumulated deficit for the three month period ended May 31, 2021 and has retrospectively adjusted the cumulative periods for the impact of such errors in the financial statements presented for the three and nine months ended May 31, 2021. The errors were a result of ineffective controls related to management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record the transactions related to the recording and tracking of the public improvement reimbursable amounts. Please see Item 4 in this Quarterly Report on Form 10-Q for our remediation plans.

7

The effect of the errors to the Company’s consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2021 were as follows:

For the Three Months Ended February 28, 2021

    

As Reported

    

Adjustments

    

As Adjusted

(In thousands)

Statement of Operations

Other Income

Recognition of public improvement reimbursables including interest income - related party

$

20,327

$

(723)

$

19,604

Income tax expense

$

(5,667)

$

178

$

(5,489)

Net Income

$

17,352

$

(545)

$

16,807

Earnings per common share - Diluted

$

0.72

$

(0.02)

$

0.70

Weighted average common shares outstanding - Diluted

24,092

24,092

24,092

For the Six Months Ended February 28, 2021

    

As Reported

    

Adjustments

    

As Adjusted

(In thousands)

Statement of Operations

Other Income

Recognition of public improvement reimbursables including interest income - related party

$

20,327

$

(723)

$

19,604

Income tax expense

$

(5,927)

$

178

$

(5,749)

Net Income

$

18,197

$

(545)

$

17,652

Earnings per common share - Diluted

$

0.76

$

(0.02)

$

0.74

Weighted average common shares outstanding - Diluted

24,064

24,064

24,064

8

The effect of the errors to the Company’s consolidated Balance Sheet as of February 28, 2021, were as follows:

As of February 28, 2021

Balance

    

As Reported

    

Adjustments

    

As Adjusted

(In thousands)

Balance Sheet

Assets

Public improvement reimbursables - Phase 1

$

21,466

$

(723)

$

20,743

Liabilities

Income taxes payable

$

4,267

$

(178)

$

4,089

Equity

Accumulated deficit

$

(72,766)

$

(545)

$

(73,311)

NOTE 3 – RESTRICTED CASH

The Company has entered into a cash-secured performance standby letter of credit agreement with its primary bank to maintain a letter of credit related to the Company’s performance obligations in the ordinary course of business. As of May 31, 2021, the Company had a letter of credit outstanding of $0.3 million and has restricted cash in the same amount.

NOTE 4 – REVENUE RECOGNITION AND REIMBURSABLE COSTS

The Company disaggregates revenue by major product line as reported on the condensed consolidated statement of operations and comprehensive income, which the Company believes best depicts the nature, timing, and uncertainty of the Company’s revenue and cash flows.

The Company primarily generates revenues through two lines of business, its water and wastewater resource development business and through the sale of finished lots in its land development business, both of which are described below.

Water and Wastewater Resource Development Segment

The Company’s water and wastewater resource development segment provides wholesale municipal water and wastewater services, through the Rangeview Metropolitan District (the “Rangeview District”) and Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below. The Rangeview District services Sky Ranch and other customers on the Lowry Range. Rangeview also operates and maintains the Elbert 86 District’s water system servicing Wild Pointe, a subdivision in Elizabeth, Colorado.

Monthly water usage and wastewater treatment fees – The Company provides water to customers, collects wastewater from those customers and treats that wastewater which is reused for irrigation and industrial demands. For these services, the Company charges customers monthly potable and reuse water fees that are comprised of a base charge and a usage charge based on actual amounts of water delivered to the customer using a tiered structure that results in higher fees for higher usage. Wastewater treatment services incur flat monthly fees. The Company recognizes these revenues at a point in time upon delivering water to the end use customers.

Water and wastewater tap fees – A tap constitutes a right to connect a residential or commercial building or property to the Company’s water and wastewater systems. Once granted, the customer may make a physical tap into the service line(s) to connect its property to the Company’s systems to obtain water and/or wastewater service. The right stays with the property. The Company has no obligation to physically connect the property to the lines, which is typically done by the home builder or commercial owner. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from the Company’s system and send wastewater to the Company. Thus, the customer has full control of the connection right as it can obtain all the benefits from this right. As such, tap fees are deemed separate and distinct performance obligations that are recognized as revenue at a point in time.

9

Land Development Segment

Sale of finished lots – The Company sells lots at its Master Planned Community, Sky Ranch, pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the home builder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot.

The second format is the sale of a finished lot pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include: (i) payment upon the delivery of a platted lot (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lot passes to the builder once the Company closes the sale of the platted lots. Because the builder takes control and legal ownership of the lot at the first closing, and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs. Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

Reimbursable public improvement costs – The Sky Ranch CAB is obligated to construct certain public improvements at Sky Ranch. Public improvements are items that are not associated with an individual lot or home, but can be used by the public, whether living in Sky Ranch or not. Public improvements include items such as roads, curbs, sidewalks, landscaping, and parks but also includes items such as water distribution systems, sewer collection systems, storm water systems, and drainage improvements. These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (collectively, the “Sky Ranch Districts”), the Sky Ranch CAB, Arapahoe County, and the local stormwater authority and, after inspection and acceptance, are turned over to the applicable governmental entity to own, operate and maintain.

Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 9 – Related Party Transactions), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note. Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments. During the initial development filing at Sky Ranch, the Sky Ranch CAB expended $32.2 million to build these public improvements, including construction support activities totaling $29.6 million and accrued interest of $2.6 million, for which the Company provided the funding. Pursuant to the funding agreement between the Company and the Sky Ranch CAB, the expended $32.2 million along with the accrued interest income and project management fees are payable to the Company since the Company provided the initial funding. In November 2019, the Sky Ranch CAB issued $13.2 million of bonds to recover a portion of the total $32.2 million expected to be received related to the public improvements constructed for the initial filing at Sky Ranch. Upon the issuance of the bonds, the Company received $10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB to fund the construction of these public improvements. Additionally, in January 2021 the Sky Ranch CAB paid the Company $0.4 million as a result of unencumbered funds from a 2020 budget surplus. With the first filing nearing completion, the Sky Ranch CAB has established a tax base with revenue generation from the expected tax receipts. Historically, the recognition of these costs was contingent upon the Sky Ranch CAB issuing bonds but as the tax base and subsequent revenues have grown, the Sky Ranch CAB has more funds and ability with which to repay the Company. The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection due to the established and growing tax base, and as such, has recognized the reimbursable public improvements costs incurred to date at Sky Ranch. The Company recognized an increase of $0.6 million to the Note receivable – related party related to Project management revenue, Other income and Interest Income - related party during the three months ended May 31, 2021, for a total outstanding receivable balance of $21.3 million. This receivable is reviewed each reporting period for impairment.

For the second phase and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures. The Sky Ranch CAB has an obligation to repay the Company but the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060, is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred. Public improvements are considered contract fulfillment costs and will be recognized in a separate Land development inventories account as funds are expended. Once collectability is deemed to be reasonably assured, the public reimbursable expenditures will be reclassified out of Land development inventories and into Notes receivable - related party. The Company will evaluate any balance in Notes receivable - related party for impairment each reporting period and an

10

impairment charge will be incurred for any amounts deemed uncollectible. The reimbursable public improvement costs bear an interest rate of 6% per annum.

Project management services – Pursuant to two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB, the Company acts as the project manager and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above), including but not limited to Sky Ranch CAB compliance; planning design and approvals; project administration; contractor agreements; and construction management and administration. The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Company receives a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible public improvements. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible public improvements are not included in the calculation of the project management fee. Soft costs and other costs incurred by the Company that are not directly related to the construction of Sky Ranch CAB-eligible public improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided, or expenses incurred for construction of public improvements that qualify as reimbursable expenses. Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. With the first phase nearing completion, the Sky Ranch CAB has an established tax base, with which Management believes provides reasonable assurance the Sky Ranch CAB can repay the Company for qualifying expenditures. The Company has determined that payment from the Sky Ranch CAB is probable and as such, the Company has recognized $23,000 and $1.6 million for the three and nine months ended May 31, 2021, of project management revenue for all reimbursable construction costs incurred to date and will recognize future project management revenue each period based on actual construction costs related to the public improvements when collectability is deemed to be reasonably assured. The $1.6 million was recognized as a component of the Notes receivable - related party and accrues interest at 6% per annum. Future amounts will be added to Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

Construction support activities – The Company performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance of the grading erosion and sediment control best management practices and other construction-related services. These activities are invoiced to the Sky Ranch CAB upon completion and will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

The following table summarizes the amounts the Company paid, what was repaid by the Sky Ranch CAB and amounts still owed to the Company by the Sky Ranch CAB:

As of May 31, 2021

Amounts payable to Pure

Payments repaid by

Cycle by the Sky Ranch

    

Costs incurred to date

    

Sky Ranch CAB

    

CAB

(In thousands)

Phase 1

Public improvements

$

27,205

$

10,505

$

16,700

Accrued interest

 

2,626

 

400

 

2,226

Project management services

 

1,556

 

 

1,556

Construction support activities

 

834

 

 

834

Phase 1 reimbursable costs

$

32,221

$

10,905

$

21,316

Phase 2

Public improvements

$

444

$

$

444

Phase 2 reimbursable costs

$

444

$

$

444

11

Public improvements and construction support activities accrue interest of 6% per annum, which was not previously recognized as the interest payments were deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. This interest was recognized as a portion of the recognition of $21.3 million of reimbursable costs as collection is deemed probable. The Company expects to incur an additional $0.5 million through the end of the calendar year 2021, with an estimated $0.4 million for construction costs related to public improvements to complete the first development phase of the initial 506 lots and expects that amount to be reimbursed to the Company along with the amounts noted in the table above as the Sky Ranch CAB issues bonds, collects fees, or property tax assessments support collectability being reasonably assured.

Deferred Revenue

As noted above, the Company recognizes certain lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received. Based on this, the Company will frequently receive milestone payments before revenue can be recognized (i.e. prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as construction activities progress measured based on costs incurred to total expected costs of the project which management believes is a faithful representation of the transfer of goods and services to the customer.

In fiscal 2018 and 2019, the Company received up-front payments for certain oil and gas leases which permitted an oil and gas operator priority rights to water deliveries over a specified period of time. As the Company was not required to perform on its delivery obligations when the payments were received, recognition of revenue was deferred and is being recognized on a straight-line basis over the agreement term. The 2018 payment has been fully recognized as of the first quarter of fiscal 2021.

The Company also received an up-front payment from an oil and gas industrial customer to reserve priority water for their operations, which the Company is recognizing this revenue based either on actual usage each reporting period or based on amounts which have expired pursuant to the agreement. The customer had up to one year from the invoice date to use such water. The customer did not use the water in the contract period which ended in January 2021, and such water was forfeited by the customer resulting in the Company recognizing revenue of $0.4 million.

Deferred revenue by segment is as follows:

    

May 31, 2021

    

August 31, 2020

(In thousands)

Land development segment

$

550

$

1,636

Water and wastewater resource development segment

 

275

 

1,965

Balance, end of period

$

825

$

3,601

Changes in deferred revenue were as follows:

    

May 31, 2021

(In thousands)

Balance, August 31, 2020

$

3,601

Deferral of revenue

 

2,293

Recognition of unearned revenue

(5,069)

Balance, May 31, 2021

$

825

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. During November 2020, the Company received the final payment of $2.2 million, including $1.6 million for outstanding open contracts in the first development filing at Sky Ranch, which represents the final lot sales in the first filing at Sky Ranch, and $0.6 million for neighborhood amenities.

NOTE 5 – FAIR VALUE MEASUREMENTS

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

12

that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine fair value.

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 May 31, 2021 or August 31, 2020.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities which include observable inputs but are not based on observable prices in active markets at the measurement date for the asset or liability. The Company had no Level 2 assets or liabilities as of May 31, 2021 or August 31, 2020.

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

NOTE 6 – WATER AND LAND ASSETS

The Company’s water rights and current water and wastewater service agreements, including capitalized terms not defined herein, are more fully described in Note 4 – Water and Land Assets in Part II, Item 8 of the 2020 Annual Report.

Investment in Water and Water Systems

The Company’s Investments in water and water systems consist of the following costs and accumulated depreciation and depletion at May 31, 2021 and August 31, 2020:

May 31, 2021

August 31, 2020

Accumulated

Accumulated

Depreciation

Depreciation

    

Costs

    

and Depletion

    

Costs

    

and Depletion

(In thousands)

Rangeview water supply

$

14,586

$

(16)

$

14,570

$

(15)

Sky Ranch water rights and other costs

 

7,371

 

(1,042)

 

7,499

 

(981)

Fairgrounds water and water system

 

2,900

 

(1,305)

 

2,900

 

(1,239)

Rangeview water system

 

17,496

 

(1,317)

 

15,948

 

(789)

Water supply – Other

 

7,552

 

(1,353)

 

7,550

 

(1,116)

Wild Pointe service rights

 

1,632

 

(741)

 

1,632

 

(708)

Sky Ranch pipeline

 

5,727

 

(745)

 

5,727

 

(602)

Lost Creek water supply

 

3,374

 

 

3,372

 

Construction in progress

 

1,021

 

 

1,339

 

Totals

 

61,659