What changed in this filing

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Item 1. Financial Statements

2021-04-14 compared with 2021-01-05 · 364 added, 269 removed, 392 unchanged (62% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

November 30, 2020

February 28, 2021

August 31, 2020

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Current assets:

Cash and cash equivalents

Cash, cash equivalents and restricted cash

Trade accounts receivable, net

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Land development inventories:

Land development - Phase 1

Land development - Phase 2

Public improvement reimbursables - Phase 2

Income taxes receivable

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Notes receivable - related parties, including accrued interest:

Public improvement reimbursables - Phase 1

Long-term land investment

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Accrued liabilities - related parties

Income taxes payable

Deferred lot sale revenues

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Three Months Ended November 30,

Three Months Ended

Six Months Ended

(In thousands, except per share amounts)

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Water and wastewater tap fees

Project management fees - recognized

Special facility projects and other

Total revenues

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Land development construction costs

Depreciation and depletion

Depletion and depreciation

Total cost of revenues

General and administrative expenses

Operating income

Operating income (loss)

Other income:

Oil and gas royalty income

Oil and gas lease income

Recognition of public improvement reimbursables - related party

Interest income

Income from reimbursement of construction costs - related party

Net income before taxes

Reimbursement of construction costs - related party

Oil and gas royalty income, net

Oil and gas lease income, net

Income from operations before income taxes

Income tax expense

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Total comprehensive income

Basic and diluted net income per common share

Weighted average common shares outstanding–basic

Weighted average common shares outstanding–diluted

Earnings per common share:

Weighted average common shares outstanding:

See accompanying Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended November 30, 2020

Three Months Ended February 28, 2021

Preferred Stock

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(In thousands)

August 31, 2020 balance:

November 30, 2020 balance:

Stock option exercises

Stock granted for services

Share-based compensation

February 28, 2021 balance:

Three Months Ended February 29, 2020

Preferred Stock

Comprehensive

Income (Loss)

(In thousands)

November 30, 2019 balance:

Three Months Ended November 30, 2019

Stock option exercises

Stock granted for services

Share-based compensation

February 29, 2020 balance:

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Six Months Ended February 28, 2021

Preferred Stock

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August 31, 2020 balance:

Stock option exercises

Stock granted for services

Share-based compensation

February 28, 2021 balance:

Six Months Ended February 29, 2020

Preferred Stock

Comprehensive

Income (Loss)

(In thousands)

August 31, 2019 balance:

Stock option exercises

Stock granted for services

Share-based compensation

Unrealized holding loss on investments

November 30, 2019 balance:

February 29, 2020 balance:

See accompanying Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended November 30,

Six Months Ended

(In thousands)

Cash flows from operating activities:

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

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

Depreciation and depletion

Share-based compensation expense

Interest added to receivable from related parties

Deferred income taxes

Interest added to receivable from related parties

Proceeds from CAB reimbursement applied to land development inventories

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Land development inventories

Taxes receivable

Recognition of public improvement reimbursables

Taxes payable

Accounts payable and accrued liabilities

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Other assets and liabilities

Net cash provided by operating activities

Net cash (used) provided by operating activities

Cash flows from investing activities:

Sale and maturities of short-term investments

Investments in water, water systems and land

Purchase of property and equipment

Net cash (used) provided by investing activities

Sale and maturities of short-term investments

Purchase of short-term investments

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from exercise of options

Payments to contingent liability holders

Net cash used by financing activities

Net change in cash and cash equivalents

Cash and cash equivalents – beginning of period

Cash and cash equivalents – end of period

Net cash provided by financing activities

Net change in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash – beginning of period

Cash, cash equivalents and restricted cash – end of period

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES

Transfer of land development costs to other assets

Transfer of land development costs to inventory

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

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

Income taxes paid

See accompanying Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2020

FEBRUARY 28, 2021

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The November 30, 2020 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three months ended November 30, 2020 and 2019, the condensed

consolidated statements of shareholders’ equity for the three months ended November 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the three months ended November 30, 2020 and 2019 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 November 30, 2020, and for all periods presented.

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

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certain qualified improvement property, and the creation of certain refundable employee retention credits.

The Company does not believe there will be any material impact to its condensed consolidated financial statements because of the CARES Act.

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

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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, reimbursable costs and expenses, 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.

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.

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.

Recently Issued Accounting Pronouncements

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ASU 2016-13 was set to be effective for public companies on January 1, 2020;

FASB delayed the effective date to January 1, 2023 for smaller reporting companies.

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 financial statements.

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

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

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Water and Wastewater Resource Development Segment

The Company’s water and wastewater resource development segment provides 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 the other customers on the Lowry Range.

The Elbert 86 District services Wild Pointe.

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 fees.

Potable and reuse water fees are comprised of a base charge and a usage charge based on actual

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.

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The right stays with the property.

The Company has no obligation to physically connect the property to the lines.

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.

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.

As such, tap fees

are deemed separate and distinct performance obligations that are recognized as revenue at a point in time.

Land Development Segment

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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.

Pursuant to agreements between the

Company and the Sky Ranch CAB (see Note 7 – 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 $ 31.6 million to build these public improvements, including accrued interest, project management fees, and construction support activities,

which the Company provided the funding for.

In November 2019, the Sky Ranch CAB issued $13.2 million of bonds to recover a portion of the $ 31.6 million of 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.

The Sky Ranch CAB fully intends to issue additional bonds at some time in the future to recover the remaining $21.1 million of total reimbursable costs not included in the initial bond offering, which pursuant to the

funding agreement between the Company and the Sky Ranch CAB would be payable to the Company since the Company provided the initial funding.

Even if the Sky Ranch CAB does not issue bonds to repay the remaining $21.1 million, the Sky Ranch CAB

will receive property tax assessments which could be used to repay the amounts owed to the Company for the public improvements.

This filing represented the Company’s and the Sky Ranch CAB’s first land development activities, as such there was

no assurance the property taxes or bond issuances would occur in a timely manner or in an amount sufficient to cover the costs of the public improvements.

Because the amount and timing were contingent, the Company did not estimate or record any

potential reimbursements until the cash was received.

Of the $10.5 million received by the Company, $6.3 million was recognized as Income from reimbursement of construction costs (related

party) in other income and the remaining $4.2 million partially reduced the remaining capitalized costs in Land development i nventories .

The agreements between the Company and the Sky Ranch CAB allow for interest to be accrued on amounts funded by the Company to

the Sky Ranch CAB.

Due to the uncertainty of collecting the interest (because this was the Company’s first development, it had no basis to support estimated payments, and payment is contingent on tax receipts or the issuance of bonds), interest

income is not recognized on the amounts owed by the Sky Ranch CAB related to the initial development until it is received.

These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including 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.

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;

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.

limited to Sky Ranch CAB compliance;

planning design and approvals;

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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 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 to be paid to the Company qualifies as a reimbursable cost to the Company.

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 i nventories 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.

Because payment is contingent on receipt of tax dollars or the issuance of bonds, project management fees are deferred and not recognized until they are received.

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 upon completion and are included in Land development i nventories and subsequently expensed through Land development construction costs unless or until reimbursement occurs.

As noted above, pursuant to the funding agreements between the Company and the Sky Ranch CAB, the Company is owed amounts it funded or that the Sky Ranch CAB was unable to pay at the time of construction.

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 November 30, 2020

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:

As of February 28, 2021

Costs incurred to date

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Construction support activities

Total reimbursable costs

As noted above, the project management services and construction support activities amounts do not include interest since payment of that interest is deemed too contingent.

The Company expects to incur an additional $1.3 million through the

end of the calendar year 2021 for construction costs related to public improvements to complete its 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 or collects property tax assessments.

Phase 1 reimbursable costs

Public improvements

Phase 2 reimbursable costs

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 some lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received.

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 receive milestone payments before revenue can be recognized (i.e.

prior to the Company completing the construction milestones which produced the revenue) which results in the Company recording deferred revenue.

The Company will recognize this

revenue into income as construction activities progress.

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.

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 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 not expected to be used by the

The customer may take up to one year from the invoice date to use such water.

If the customer uses water, the Company recognizes the amount of water used as revenue in the period the water is delivered.

If the customer does not use the

water in the contract period, such water is forfeited by the customer.

The Company evaluates the likelihood that the customer will use the water each reporting period and estimates and recognizes any amounts not anticipated to be used by the

customer as revenue in the period the Company determines it is remote the customer will use all the remaining prepaid water volume during the remaining contract period.

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:

November 30, 2020

February 28, 2021

August 31, 2020

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Changes in deferred revenue were as follows:

November 30, 2020

February 28, 2021

(In thousands)

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Recognition of unearned revenue

Balance, November 30, 2020

For the three months ended November 30, 2020 and 2019, we recognized deferred land development revenues of $2.4 million and $8.5 million, and recognized deferred oil and gas leases and water sales revenues of $1.2

million and $1.9 million.

Balance, February 28, 2021

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 the three months ended November 30, 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.

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

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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 November 30, 2020 or August 31, 2020.

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 November 30, 2020 or August 31, 2020.

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

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Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The Company had one Level 3 liability, the contingent portion of the CAA, as of

November 30, 2020 and August 31, 2020.

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.

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.

There were no assets or liabilities measured at fair value on a recurring basis as of November 30, 2020 and August 31, 2020.

NOTE 5 – WATER AND LAND ASSETS

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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 November 30, 2020 and August 31, 2020:

November 30, 2020

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:

February 28, 2021

August 31, 2020

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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 November 30, 2020, the recorded obligation of the CAA is

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.

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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 Land Board royalty.

In November 2020, the Company entered into separate contracts with KB Home, Meritage Homes, Melody (a DR Horton Company) and Challenger Homes to sell 789 single-family attached and detached residential lots at the Sky Ranch property.

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 filing of the Sky Ranch project, the Company was able to realize a 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 filing two.

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.

In January 2021, the Company expects to begin construction on the second filing 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 future use.

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.

WISE Partnership

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Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility enterprise (“Aurora Water”).

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 November 30, 2020 and 2019, the Company through the Rangeview District, purchased an additional 166 and 0 acre-feet of WISE water for $0.3 million and $0.

See further discussion in

Note 7 – Related Party Transactions.

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.

Lease Commitments

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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.

For both three month periods ended November 30, 2020 and 2019, the Company recorded less than $0.1 million of rent expense related to its office lease.

During both the three month

periods ended November 30, 2020 and 2019, the Company paid less than $0.1 million against the Lease obligations — operating leases .

For six months ended February 28, 2021 and February 29, 2020, the Company recorded less than $0.1 million of rent expense related to its office lease.

During the six months ended

February 28, 2021 and February 29, 2020, the Company paid less than $0.1 million against the Lease obligations — operating leases .

Operating lease expense is generally recognized evenly over the term of the lease.

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

As of November 30, 2020

As of February 28, 2021

As of August 31, 2020

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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.

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 November 30, 2020

and August 30, 2020, there were 979,382 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;

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.

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 three months ended November 30, 2020:

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:

Weighted Average

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Net settlement exercised

Outstanding at November 30, 2020

Options exercisable at November 30, 2020

On September 23, 2020, there were 85,000 stock options granted to employees, which vest evenly over five years from the date of the grant.

All 85,000 options expire no more than ten years from the date of the grant.

The weighted-average grant-date fair value of stock options granted was $3.93.

Additionally, on September 23, 2020, there were 30,000 stock options granted to an executive officer which vest evenly over three years from the date of the grant.

All 30,000 options expire no more than ten years

from the date of the grant.

The weighted-average grant-date fair value of stock options granted was $3.37.

During the three months ended November 30, 2020, 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

Outstanding at February 28, 2021

Options exercisable at 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 November 30, 2020, resulted in 12,118 shares issued and 5,882 options cancelled in

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.

There were no net settlement exercises during the three months ended November 30, 2019.

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 three months ended November 30, 2020:

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:

Weighted Average

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Forfeited (a)

Non-vested options outstanding at November 30, 2020

(a) All non-vested options are expected to vest.

For the three months ended November 30, 2020 and 2019, the Company recorded less than $0.1 million and $0.1 million of stock-based compensation expense.

At November 30, 2020, the Company had unrecognized compensation expenses totaling $0.8 million relating to non-vested options that are expected to vest.

Non-vested options outstanding at February 28, 2021

All non-vested options are expected to vest.

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

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Through the WISE Financing Agreement, the Company agreed to fund the Rangeview District’s cost of participating in the regional water supply project known as the WISE partnership.

During the three months ended

November 30, 2020 and 2019, the Company through the Rangeview District, purchased an additional 166 and 0 acre-feet of WISE water for $0.3 million and $0.

The cost of the water to the members is based on the water rates charged by Aurora

Water and can be adjusted each January 1.

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.

The cost of the

water to the members is based on the water rates charged by Aurora Water and can be adjusted each January 1.

As of January 1, 2021, WISE water was $5.77 per thousand gallons and such rate will remain in effect through calendar 2021.

In addition, the Company pays certain system operational and construction

If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves.

addition, the Company pays certain system operational and construction costs.

If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and

sell water amongst themselves.

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

November 30, 2020, is $6.1 million.

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 November 30,

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,

The maturity date of the loan is December 31, 2020, at which time it will automatically renew for another 12 month term.

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Agreement remains in effect.

Of the November 30, 2020 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

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

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.

Sky Ranch Community Authority Board

Sky Ranch Metropolitan District Nos.

1, 3, 4 and 5 (collectively, 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 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.

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

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All amounts owed under the FFAA bear interest at a rate of 6% per annum.

Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income is not

recognized on the amounts owed by the Sky Ranch CAB until the bonds are issued.

Due to this contingency, interest is deferred until the point in time when bonds are issued.

At that point, the accrued interest will be recognized.

The Sky Ranch CAB

agrees to exercise reasonable efforts to issue bonds to reimburse the Company subject to certain limitations.

In addition, the Sky Ranch CAB agrees to utilize any available moneys not otherwise pledged to payment of debt, used for operation and

maintenance expenses, or otherwise encumbered, to reimburse the Company.

Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058, shall be deemed forever discharged and satisfied in full.

As of November 30, 2020, the balance of the Company’s advances for improvements, including interest, net of costs reimbursed in November 2019, to the Sky Ranch CAB totaled $21.1 million, of which $0.3 million is

included in Accrued liabilities, $19.3 million was expensed through Land development construction costs and $1.5 million of interest,

which has not yet been recognized.

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.

Based on the specific costs being

reimbursed by the Sky Ranch CAB, the Company records those costs that have been previously expensed in cost of sales as other income and those costs that remain capitalized as land development inventory costs as a reduction of the related land

development inventory costs held in Land development i nventories.

Any reimbursable costs repaid after all capitalized expenses and lot revenues have been fully

recognized are recorded as Other income.

The Company expects the Sky Ranch CAB to fully reimburse all amounts owed either through future bond issuances or remittance of property taxes.

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.

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The advances by the Company accrue interest at the rate of 6% per annum from the date of

As of the November 30, 2020 and August 31, 2020, the balances included in Notes receivable – related parties, related to the Operation Funding Agreement are immaterial.

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 combined and Crestone Peak Resources (oil & gas operations).

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.

For the water and wastewater resource development segment, the Company primarily provides water and wastewater services on behalf of Rangeview Metropolitan

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

November 30, 2020

February 28, 2021

August 31, 2020

(In thousands)

Accrued compensation

Due to the Sky Ranch CAB - related party

Other operating payables

Land development - warranty and other - related party

Accrued compensation

Other operating payables

Operating lease obligations

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Professional fees

Due to the Rangeview District - related party

Due to Rangeview - related party

NOTE 11 – COMMITMENTS AND CONTINGENCIES

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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 was not involved in litigation or other legal proceedings and had no contingencies where the risk of material loss was reasonably possible as of November 30, 2020, or August 31, 2020.

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

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requirements, namely the water and wastewater resource development segment and the land development segment.

A third segment, Build-to-Rent (“BTR”), will be presented once material to operations.

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 three months

ended November 30, 2020 and 2019, was done exclusively at the Company’s Sky Ranch Master Planned Community.

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;

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

Three Months Ended November 30, 2020

Three Months Ended February 28, 2021

wastewater resource

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Total cost of revenue

Pretax operating income

Three Months Ended November 30, 2019

Three Months Ended February 29, 2020

wastewater resource

(In thousands)

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Total cost of revenue

Reimbursement of construction costs

Gross Margin after reimbursables

Pretax operating income

Six Months Ended February 28, 2021

wastewater resource

(In thousands)

Total revenue

Cost of revenue

Depreciation and depletion

Total cost of revenue

Six Months Ended February 29, 2020

wastewater resource

(In thousands)

Total revenue

Cost of revenue

Depreciation and depletion

Total cost of revenue

The following table summarizes total assets for the Company’s water and wastewater resource development business and land development business by segment.

The assets consist of water rights and water

and wastewater systems in the Company’s water and wastewater resource development segment and land, inventories and deposits in the Company’s land development segment.

The Company’s other assets (“Corporate”) primarily consist of cash and cash

equivalents, equipment, mineral rights, related party notes receivables and an income tax receivable.

November 30, 2020

The assets consist of water rights and water and wastewater

systems in the Company’s water and wastewater resource development segment and land, inventories and deposits in the Company’s land development segment.

The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents and

restricted cash, equipment, and related party notes receivables.

February 28, 2021

August 31, 2020

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NOTE 13 – INCOME TAXES

For the three months ended November 30, 2020 and 2019, the Company recorded income tax expense of $0.3 million and $1.9 million.

The net expense during the three months ended November 30, 2020

consisted of current income tax expense of $0.2 million and deferred income tax expense of $0.1 million.

The net expense during the three months ended November 30, 2019 consisted of current income tax expense of $1.2 million and deferred income tax

expense of $0.7 million.

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items.

At November 30, 2020 the Company is estimating an annual effective tax rate

of approximately 25%.

As of February 28, 2021 the Company is estimating an annual effective tax

rate of approximately 25%.

Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made.

There is a potential for volatility of the effective tax rate due to

various factors.

There is a potential for volatility of the effective tax rate due

to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year.

For the three

months ended November 30, 2020 and 2019, the Company’s effective income tax rate was 24.6% and 24.7%

No taxes were paid during the three months ended November 30, 2020 and 2019, respectively.

Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for income tax purposes.

Significant components of the Company’s deferred tax liability as of November 30, 2020 and August 31, 2020 are as follows:

November 30, 2020

information for the three and six months ended February 28, 2021 and February 29, 2020 are as follows:

Three Months Ended

Six Months Ended

(In thousands)

Effective income tax rate

Income tax expense (benefit):

Income taxes paid:

used for income tax purposes.

Significant components of the Company’s deferred tax liability as of February 28, 2021 and August 31, 2020 are as follows:

February 28, 2021

August 31, 2020

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(In thousands)

Net operating loss carryforwards

Accrued compensation

Deferred revenues

Depreciation and depletion

Non-qualified stock options

Accrued compensation

Deferred revenues

Net operating loss carryforwards

Net deferred tax liability

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decrease earnings per share).

The options excluded totaled 180,000 for the three months ended November 30, 2020.

There were no excluded options for the three months ended November 30, 2019.

Three Months Ended November 30,

(In thousands, except share and per share

The options excluded totaled 0 and 130,000 for the three and six months ended February 28, 2021.

There were no excluded options for the three and six months ended February 29, 2020.

Three Months Ended

Six Months Ended

(In thousands, except share and per share amounts)

Basic weighted average common shares

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Earnings per share - diluted

NOTE 15 – SUBSEQUENT EVENT

The Company announced in March 2021 the launch of a new line of business which will be referred to as Build-to-Rent (“BTR”).

BTR is expected to represent as a separate reporting segment and will be presented once

Previously reported financial information for the current segments will not change as a result of the new segment.

During the initial development phase of Sky Ranch, the Company retained ownership of three residential lots, on which the Company has begun building three single family homes which Pure Cycle will own, maintain and

rent to qualified renters.

The Company has contracted out the construction to a local construction company and expects these three homes to be completed and ready for renters in the fall of 2021.

After the successful completion and operational

start up of the three houses in the first phase, the Company intends to expand this BTR line in the second development phase of Sky Ranch by building and renting homes on the 106 lots that were not sold to the Company's home builder partners.

Grading on the second phase of Sky Ranch has begun, and once complete the Company will look to partner with certain builders to construct additional BTR units as the second development phase of Sky Ranch is completed.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements