PURE CYCLE CORP - Quarter Report: 2021 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended February 28, 2021

or

For the transition period from __________ to __________

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.

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 April 1, 2021:

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PURE CYCLE CORPORATION

INDEX TO FEBRUARY 28, 2021 FORM 10-Q

PART I – FINANCIAL INFORMATION

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

FEBRUARY 28, 2021

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The February 28, 2021 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three and six months ended February 28, 2021 and February 29, 2020, the condensed consolidated statements of shareholders’ equity for the three and six months ended February 28, 2021 and February 29, 2020, and the condensed consolidated statements of cash flows for the six months ended February 28, 2021 and February 29, 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 February 28, 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.

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 three months ended February 28, 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 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 now 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.

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 – 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 February 28, 2021, the Company had a letter of credit outstanding of $0.3 million and has restricted cash in the same amount.

NOTE 3 – 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 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. The Elbert 86 District services 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 purposes. 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.

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 Community Authority Board (the “Sky Ranch CAB”) is obligated to construct certain public improvements at Sky Ranch. Public improvements are items that are not associated with one lot or one 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 and Arapahoe County, and, after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain.

Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 8 – Related Party Transactions), the Company is obligated to provide funding to the Sky Ranch CAB related to the construction of these public improvements. 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 $29.4 million to build these public improvements, including construction support activities, for which the Company provided the funding. Pursuant to the funding agreement between the Company and the Sky Ranch CAB, the expended $29.4 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 $32.4 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, 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 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 future bonds, and as such, has recognized the reimbursable public improvements costs incurred to date at Sky Ranch. The Company recognized a Note receivable – related party in the amount of $21.5 million which bears an interest rate of 6% per annum and recognized $1.6 million as Project management revenue, $1.0 million as Interest income, and $18.9 million as Other income during the three and six months ended February 28, 2021. This receivable will be 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 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 project management revenue for all reimbursable construction costs incurred to date of $1.6 million 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 Notes receivable - related party. 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:

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 $21.5 million of reimbursable costs as collection is probable. Project management fees do not accrue interest. The Company expects to incur an additional $0.9 million through the end of the calendar year 2021, with an estimated $0.6 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.

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:

Changes in deferred revenue were as follows:

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 4 – 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 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 February 28, 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. The Company had no Level 2 assets or liabilities as of February 28, 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 had one Level 3 asset, Notes receivable - related party, and one liability, the contingent portion of the CAA, as of February 28, 2021.

The Company has determined the fair value of the reimbursable public improvements note receivable to be $17.8 million, compared to a carrying value of $21.5 million. The Company determined the fair value by estimating future cash flows discounted by a market rate. This note receivable does not have a stated repayment schedule and the Company relies on Sky Ranch CAB budgets and forecasted property tax revenues to estimate future cash flows. The Other notes receivables do not have a determinable fair value as the borrowing and repayments from the Rangeview District and the Sky Ranch CAB cannot be reasonably estimated.

The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 6 – 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.

NOTE 5 – 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.

The Company’s Investments in water and water systems consist of the following costs and accumulated depreciation and depletion at February 28, 2021 and August 31, 2020:

Construction in progress primarily consists of additional water facilities at Sky Ranch. The Company anticipates the additional facilities will be placed in service during fiscal 2021.

NOTE 6 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

The Participating interests in export water supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular form but is described below.

The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, if the Company does not sell the Export Water, the holders of the Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received they are either retained by the Company or remitted to various parties pursuant to the CAA. As of February 28, 2021, the recorded obligation of the CAA is $0.3 million and the contingent off-balance sheet portion is $0.6 million.

The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority. This means that the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. Of the next $6.3 million of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive $5.6 million of revenue. Thereafter, the Company will be entitled to all but $0.2 million of the proceeds from the sale of Export Water after deduction of the State Land Board royalty.

In November 2020 and February 2021, the Company entered into separate contracts with KB Home, Melody (a DR Horton Company), Challenger Homes, and Lennar Colorado, LLC to sell 789 single-family attached and detached residential lots at the Sky Ranch property. This next development phase of Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases. Due to the Company’s strong performance in the first phase of the Sky Ranch project, the Company was able to realize an approximate 30% increase in lot prices from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of the second phase. The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries. The Company began construction in February 2021 on the second phase at Sky Ranch, which is expected to include 895 residential lots. The 106 lots not currently under contract to home builders are being retained for use as long-term Build-to-Rent rental properties.

In December 2014, the Company and the Rangeview District entered the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing Agreement”), which requires the Company to fund the Rangeview District’s participation in WISE. During the three months ended February 28, 2021 and February 29, 2020, the Company through the Rangeview District, purchased an additional 35 and 400 acre-feet of WISE water for less than $0.1 million and $0.6 million. See further discussion in Note 8 – Related Party Transactions.

In February 2018, the Company entered into an operating lease for 11,393 square feet of office and warehouse space in Watkins, Colorado. The lease has a three-year term with payments of $6,600 per month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary base payments.

Operating lease expense is generally recognized evenly over the term of the lease. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed in the future, the Company will be required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of 6% on August 31, 2019, for all leases that commenced prior to that date. The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the condensed consolidated balance sheet as follows:

NOTE 7 – SHAREHOLDERS’ EQUITY

The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective on April 12, 2014. Executives, eligible employees, consultants and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. As of February 28, 2021 and August 30, 2020, there were 970,723 and 1,088,500 shares available for grant under the 2014 Equity Plan. The Company began awarding options and stock awards under the 2014 Equity Plan in January 2015. Prior to the effective date of the 2014 Equity Plan, the Company granted options and stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired on April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the six months ended February 28, 2021:

On January 13, 2021 the six non-employee Board members were each granted 2,000 unrestricted stock grants. The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the Company's common stock on the date of grant of $11.33. There is no vesting requirement for the unrestricted stock grants and the Company recognized the full expense of $0.1 million in the three months ended February 28, 2021.

During the six months ended February 28, 2021, the Company had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise. Net settlement exercises during the three months ended February 28, 2021 resulted in 3,159 shares issued and 3,341 options cancelled in settlement of shares issued. Net settlement exercises during the six months ended February 28, 2021 resulted in 15,277 shares issued and 9,223 options cancelled in settlement of shares issued. There were no net settlement exercises during the six months ended February 29, 2020.

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the six months ended February 28, 2021:

For each three month periods ended February 28, 2021 and February 29, 2020, the Company recorded $0.2 million of stock-based compensation expense. For each six month periods ended February 28, 2021 and February 29, 2020, the Company recorded $0.3 million of stock-based compensation expense.

At February 28, 2021, the Company had unrecognized compensation expenses totaling $0.7 million relating to non-vested options that are expected to vest. The weighted-average period over which these options are expected to vest is approximately three years.

NOTE 8 – RELATED PARTY TRANSACTIONS

The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of the Rangeview District. On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”). The Company provides funding pursuant to the Participation Agreement annually, which for fiscal 2021 and 2020 is an immaterial amount.

To date, the Company has capitalized the funding provided pursuant to the WISE Financing Agreement because the funding has been provided to purchase capacity in the WISE infrastructure. The Company’s total investment in the WISE assets as of February 28, 2021, is $6.2 million.

Additionally, the Rangeview District has entered into an agreement with WISE to construct a special facility during fiscal 2021. Pure Cycle will fund the construction of the special facility and Rangeview will remit 100% of the revenue to Pure Cycle.

In 1995, the Company extended a loan to the Rangeview District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (5.25% at February 28, 2021). The maturity date of the loan is December 31, 2020, at which time it will automatically renew for another 12 month term. In January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement remains in effect. Of the February 28, 2021 balance in Notes receivable - related parties, $1.1 million includes borrowings by the Rangeview District of $0.7 million and accrued interest of $0.4 million. Of the August 31, 2020 balance in Notes receivable - related parties, $1.1 million includes borrowings by the Rangeview District of $0.6 million and accrued interest of $0.5 million.

The Sky Ranch Districts and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of each of the Rangeview District, the Sky Ranch Districts and the Sky Ranch CAB consist of three employees of the Company and one independent board member. Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District Nos. 1 and 5 formed the Sky Ranch CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property.

The Company and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (the “FFAA”) effective November 2017, obligating the company to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023. All amounts owed under the FFAA bear interest at a rate of 6% per annum. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058 for first phase and December 31, 2060 for the second phase, shall be deemed forever discharged and satisfied in full.

As of February 28, 2021, the balance of the Company’s advances for improvements, including interest, net of reimbursements from the Sky Ranch CAB, to the Sky Ranch CAB totaled $21.5 million. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB which have been certified by an independent third-party.  Previously, the reimbursable expenditures funded by the Company were expensed through Land development construction costs and project management revenue and interest income were not recognized as the reimbursement was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonable assured. Additionally, the Sky Ranch CAB is contractually obligated to utilize any available funds not otherwise pledged to payment of previously issued bonds, used for operation and maintenance expenses, or otherwise encumbered, to reimburse the Company. As the collectability of reimbursable expenditures incurred to date for the first development phase of Sky Ranch is determined to be probable, the Company has recognized the remaining $21.5 million as Notes receivable – related party and recognized $1.6 million as Project management revenue, $1.0 million as Interest income, and $18.9 million as Other income. 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. Costs incurred will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

Refer to Note 3 - Revenue Recognition for a summary of reimbursable costs incurred to date, payments made from the Sky Ranch CAB, and any outstanding reimbursable amounts.

In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the Sky Ranch CAB obligating the Company to advance funding to the Sky Ranch CAB for operation and maintenance expenses for the 2018 and 2019 calendar years. All payments are subject to annual appropriations by the Sky Ranch CAB in its absolute discretion.  The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance. As of the February 28, 2021 and August 31, 2020,  the balances included in Notes receivable – related parties, related to the Operation Funding Agreement are immaterial.

NOTE 9 – SIGNIFICANT CUSTOMERS

The Company has significant customers in its operations. For the water and wastewater resource development segment, the Company primarily provides water and wastewater services on behalf of Rangeview Metropolitan District. The significant end users include all Sky Ranch homes in aggregate, Crestone Peak Resources (oil & gas operations) and the WISE partnership related to a special facilities construction project. For the land development segment and water and wastewater tap fees, which are reported within the water and wastewater resource development segment, significant customers include Taylor Morrison, KB Home and Richmond Homes.

NOTE 10 – ACCRUED LIABILITIES

NOTE 11 – COMMITMENTS AND CONTINGENCIES

The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a material loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. The Company is involved in certain legal proceedings as in the ordinary course of adjudicating and protecting its water and water rights. The Company had no contingencies where the risk of material loss was reasonably possible as of February 28, 2021, or August 31, 2020.

NOTE 12 – SEGMENT INFORMATION

The water and wastewater resource development business includes selling water services to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater. The land development segment includes all the activities necessary to develop and sell finished lots, which as of and for the six months ended February 28, 2021 and February 29, 2020, was done exclusively at the Company’s Sky Ranch Master Planned Community.

Oil and gas operations, although material in certain years, are deemed a passive activity as the CODM does not actively allocate resources to these projects; therefore, this is not classified as a reportable segment.

The tables below present the measure of profit and assets the CODM uses to assess the performance of the segment for the periods presented:

		Six Months Ended February 29, 2020
		Water and wastewater resource development				Land development				Corporate				Total
		(In thousands)
Total revenue		$	3,172			$	10,807			$	—			$	13,979
Cost of revenue			(552	)			(9,880	)			—				(10,432	)
Depreciation and depletion			(602	)			—				—				(602	)
Total cost of revenue			(1,154	)			(9,880	)			—				(11,034	)
Gross margin		$	2,018			$	927			$	—			$	2,945

		February 28, 2021				August 31, 2020
		(In thousands)
Water and wastewater resource development		$	54,949			$	56,267
Land development			6,338				6,975
Corporate			47,239				26,519
Total assets		$	108,526			$	89,761

		Three Months Ended								Six Months Ended
		February 28, 2021				February 29, 2020				February 28, 2021				February 29, 2020
		(In thousands)
Effective income tax rate			24.7	%			22.3	%			24.7	%			24.6	%
Income tax expense (benefit):
Current		$	5,723			$	76			$	5,856			$	1,244
Deferred			(56	)			3				71				722
Total		$	5,667			$	79			$	5,927			$	1,966
Income taxes paid:
Federal		$	—			$	877			$	—			$	877
State			—				194				—				194
Total		$	—			$	1,071			$	—			$	1,071

		February 28, 2021				August 31, 2020
Deferred tax assets (liabilities):		(In thousands)
Depreciation and depletion			(1,654	)			(1,701	)
Non-qualified stock options			522				491
Accrued compensation			66				167
Deferred revenues			64				89
Other			45				45
Net operating loss carryforwards		$	—			$	23
Net deferred tax liability		$	(957	)		$	(886	)

		Three Months Ended								Six Months Ended
		February 28, 2021				February 29, 2020				February 28, 2021				February 29, 2020
		(In thousands, except share and per share amounts)
Net income		$	17,352			$	274			$	18,197			$	6,037
Basic weighted average common shares			23,881,655				23,846,265				23,874,198				23,836,431
Effect of dilutive securities			210,693				263,273				190,216				243,685
Weighted average shares applicable to diluted earnings per share			24,092,349				24,109,538				24,064,414				24,080,116
Earnings per share - basic		$	0.73			$	0.01			$	0.76			$	0.25
Earnings per share - diluted		$	0.72			$	0.01			$	0.76			$	0.25

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

		Three Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource development revenue		$	2,676			$	1,254			$	1,422				113	%
Land development revenue			2,063				2,265				(202	)			(9	)%
Total revenue			4,739				3,519				1,220				35	%
Water and wastewater development cost of revenue			(994	)			(631	)			363				58	%
Land development cost of revenue			(269	)			(1,817	)			(1,548	)			(85	)%
Total cost of revenue			(1,263	)			(2,448	)			(1,185	)			(48	)%
General and administrative expense			(1,418	)			(1,132	)			286				25	%
Other income, net			20,961				414				20,547				4,963	%
Income taxes			(5,667	)			(79	)			5,588				7,073	%
Net income		$	17,352			$	274			$	17,078				6,233	%
Basic EPS		$	0.73			$	0.01			$	0.72				7,200	%
Diluted EPS		$	0.72			$	0.01			$	0.71				7,100	%
Water delivered (thousands of gallons)			5,820				4,011				1,809				45	%
Water and wastewater taps sold			51				45				6				13	%
Lots delivered			—				20				(20	)			(100	)%

		Six Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource revenue		$	5,188			$	3,172			$	2,016				64	%
Land development revenue			4,419				10,807				(6,388	)			(59	)%
Total revenue			9,607				13,979				(4,372	)			(31	)%
Water and wastewater resource cost of revenue			(2,020	)			(1,154	)			866				75	%
Land development cost of revenue			(1,988	)			(9,880	)			(7,892	)			(80	)%
Total cost of revenue			(4,008	)			(11,034	)			(7,026	)			(64	)%
General and administrative expense			(2,588	)			(2,018	)			570				28	%
Other income, net			21,113				7,076				14,037				198	%
Income taxes			(5,927	)			(1,966	)			3,961				201	%
Net income		$	18,197			$	6,037			$	12,160				201	%
Basic EPS		$	$ 0.76			$	$ 0.25			$	$ 0.51				204	%
Diluted EPS		$	$ 0.76			$	$ 0.25			$	$ 0.51				204	%
Water delivered (thousands of gallons)			109,712				20,012				89,700				448	%
Water and wastewater taps sold			87				96				(9	)			(9	)%
Lots delivered			22				136				(114	)			(84	)%

		Three Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage		$	74			$	37			$	37				100	%
Oil and gas operations usage			583				20				563				2,815	%
Wastewater treatment fees			51				20				31				155	%
Water and wastewater tap fees			1,583				1,173				410				35	%
Other revenue			385				4				381				9,525	%
Total segment revenue			2,676				1,254				1,422				113	%
Water service costs			(213	)			(207	)			6				3	%
Wastewater service costs			(64	)			(38	)			26				68	%
Depreciation			(354	)			(383	)			(29	)			(8	)%
Other			(363	)			(3	)			360				12,000	%
Total expenses			(994	)			(631	)			363				58	%
Segment operating income		$	1,682			$	623			$	1,059				170	%
Water deliveries (thousands of gallons)
On Site			599				1,211				(612	)			(51	)%
Export - Commercial			95				259				(164	)			(63	)%
Sky Ranch			2,357				349				2,008				575	%
Wild Pointe			2,707				2,012				695				35	%
O&G operations			62				180				(118	)			(66	)%
Total water deliveries			5,820				4,011				1,809				45	%

		Six Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage		$	241			$	140			$	101				72	%
Oil and gas operations usage			1,782				57				1,725				3,026	%
Wastewater treatment fees			93				40				53				133	%
Water and wastewater tap fees			2,666				2,845				(179	)			(6	)%
Other revenue			406				90				316				351	%
Total segment revenue			5,188				3,172				2,016				64	%
Water service costs			(758	)			(461	)			297				64	%
Wastewater service costs			(156	)			(64	)			92				144	%
Depreciation			(719	)			(602	)			117				19	%
Other			(387	)			(27	)			360				1,333	%
Total expenses			(2,020	)			(1,154	)			866				75	%
Segment operating income		$	3,168			$	2,018			$	1,150				57	%
Water deliveries (thousands of gallons)
On Site			3,240				6,671				(3,431	)			(51	)%
Export - Commercial			2,448				1,903				545				29	%
Sky Ranch			14,655				722				13,933				1,930	%
Wild Pointe			9,202				9,788				(586	)			(6	)%
O&G operations			80,166				928				79,238				8,539	%
Total water deliveries			109,711				20,012				89,699				448	%

		Three Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for lots delivered)
Lot sales		$	515			$	2,265			$	(1,750	)			(77	)%
Project management revenue			1,548				—				1,548				—
Total revenue			2,063				2,265				(202	)			(9	)%
Land development construction			(233	)			(1,645	)			(1,412	)			(86	)%
Sky Ranch property tax			(36	)			(172	)			(136	)			(79	)%
Total costs of revenue			(269	)			(1,817	)			(1,548	)			(85	)%
Segment operating income		$	1,794			$	448			$	1,346				300	%
Lots delivered			—				20				(20	)			(100	)%

		Six Months Ended
		February 28, 2021				February 29, 2020				$ Change Increase/ (Decrease)				% Change
		(In thousands, except for lots delivered)
Lot sales		$	2,871			$	10,807			$	(7,936	)			(73	)%
Project management revenue			1,548				—				1,548				—
Total revenue			4,419				10,807				(6,388	)			(59	)%
Land development construction			(1,944	)			(9,684	)			(7,740	)			(80	)%
Sky Ranch property tax			(44	)			(196	)			(152	)			(78	)%
Total costs of revenue			(1,988	)			(9,880	)			(7,892	)			(80	)%
Segment operating income		$	2,431			$	927			$	1,504				162	%
Lots delivered			22				136				(114	)			(84	)%

		Six Months Ended
		February 28, 2021				February 29, 2020				$ Change				% Change
		(In thousands)
Cash (used) provided by:
Operating activities		$	(87	)		$	16,542			$	(16,629	)			(101	)%
Investing activities		$	(959	)		$	(1,156	)		$	197				17	%
Financing activities		$	12			$	31			$	(19	)			(61	)%

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Exhibit Number		Description
3.1		Articles of Incorporation of the Company. Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on December 14, 2007.
3.2		Bylaws of the Company. Incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A filed on December 14, 2007.
31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
32.2		Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101.INS		XBRL Instance Document. *
101.SCH		XBRL Taxonomy Extension Schema Document. *
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document. *
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB		XBRL Taxonomy Extension Label Linkbase Document. *
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document. *

*	Filed herewith.

**	Furnished herewith.

/s/ Kevin B. McNeill
Kevin B. McNeill
Vice President and Chief Financial Officer
April 14, 2021