What changed in this filing

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Item 1. Financial Statements

2021-07-09 compared with 2021-04-14 · 271 added, 391 removed, 365 unchanged (64% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

February 28, 2021

August 31, 2020

(In thousands, except share and per share

(In thousands, except share and

per share amounts)

Current assets:

36 unchanged sentences

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except per share amounts)

15 unchanged sentences

Other income:

Recognition of public improvement reimbursables - related party

Interest income

Reimbursement of construction costs - related party

Recognition of public improvement reimbursables including interest income - related party

Oil and gas royalty income, net

Oil and gas lease income, net

Interest income from investments

Reimbursement of construction costs - related party

Income from operations before income taxes

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended February 28, 2021

Three Months Ended May 31, 2021

Preferred Stock

2 unchanged sentences

(In thousands)

November 30, 2020 balance:

February 28, 2021 balance:

Prior period adjustment

Stock option exercises

1 unchanged sentence

Share-based compensation

February 28, 2021 balance:

Three Months Ended February 29, 2020

May 31, 2021 balance:

Three Months Ended May 31, 2020

Preferred Stock

2 unchanged sentences

(In thousands)

November 30, 2019 balance:

February 29, 2020 balance:

Stock option exercises

1 unchanged sentence

Share-based compensation

February 29, 2020 balance:

May 31, 2020 balance:

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Six Months Ended February 28, 2021

Nine Months Ended May 31, 2021

Preferred Stock

6 unchanged sentences

Share-based compensation

February 28, 2021 balance:

Six Months Ended February 29, 2020

May 31, 2021 balance:

Nine Months Ended May 31, 2020

Preferred Stock

7 unchanged sentences

Unrealized holding loss on investments

February 29, 2020 balance:

May 31, 2020 balance:

See accompanying Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

(In thousands)

11 unchanged sentences

Taxes receivable

Recognition of public improvement reimbursables

Taxes payable

Recognition of public improvement reimbursables, including interest

Taxes payable net of taxes receivable

Accounts payable and accrued liabilities

1 unchanged sentence

Other assets and liabilities

Net cash (used) provided by operating activities

Net cash provided by operating activities

Cash flows from investing activities:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 May 31, 2021 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended May 31, 2021 and 2020, the condensed consolidated statements of shareholders’ equity for the three and nine months ended May 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended May 31, 2021 and 2020 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited.

The unaudited condensed consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2021, and for all periods presented.

It is suggested that the accompanying condensed consolidated financial statements and notes be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 10, 2020.

The results of operations for interim periods presented are not necessarily indicative of the operating results expected for the full fiscal year.

The August 31, 2020 balance sheet was derived from the Company’s audited consolidated financial statements.

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

On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus

(“COVID-19”) pandemic.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary

changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of

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

There has not been a material impact to the Company's condensed consolidated financial statements as a result of the CARES Act.

On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits.

COVID-19 has delayed the second phase of the Sky Ranch development revenue recognition due to the extended time taken to approve the platted lots through the County Government.

Other than the delay of the approval of the platted lots, there has not been a material impact to the Company’s condensed consolidated financial statements as a result of the CARES Act.

Use of Estimates

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.

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 preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Estimates are used to account for certain items such as revenue recognition, timing and amount of reimbursable costs and expenses and the associated repayment, costs of revenue for lot sales, share-based compensation, deferred tax asset and liability valuation, depreciation, and the recoverability of long-lived assets.

Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

During the nine months ended May 31, 2021, the Company revised its estimates to conclude that the reimbursable public improvements, project management revenue and interest income related to the first development phase at Sky Ranch are reasonably assured of payment.

Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), the Company was unable to estimate when or if it would receive payment for these items and deferred recognition of them until the cash was received from the Sky Ranch CAB.

As a result of an established and growing tax base resulting from the success of the initial filing, added mill levies, and additional unencumbered fees received by the Sky Ranch CAB, the Company believes repayment of the public improvements, payment of the project management fees, and interest income are deemed reasonably assured.

Based on this, the Company has recognized these items in the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

The Company continually assesses new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company

undertakes a study to determine the consequences of the change to its consolidated financial statements and to ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the

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:

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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.

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;

FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023.

however, the FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023.

The Company continues to monitor economic implications of the COVID-19 pandemic;

however, based on current market conditions, the Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.

NOTE 2 – PRIOR PERIOD ADJUSTMENT

The Company discovered certain errors in the amounts previously reported for the three and six months ended February 28, 2021, which if these errors though immaterial in the given periods, were corrected in the three months ended May 31, 2021, management believes these corrections would have a material impact on the current reported three month consolidated statement of operations, specifically the recognition of Public improvement reimbursables including interest income - related party.

The Company’s President and the Chief Financial Officer evaluated the effects of the errors on the consolidated financial statements for the three and six months ended February 28, 2021, which each concluded that the errors were not material to those presented results.

Based on this evaluation, the errors did not rise to the level of requiring a restatement of the financial information for the three and six months ended February 28, 2021, contained in the Form 10-Q as previously filed.

Accordingly, management has corrected these errors by adjusting opening accumulated deficit for the three month period ended May 31, 2021 and has retrospectively adjusted the cumulative periods for the impact of such errors in the financial statements presented for the three and nine months ended May 31, 2021.

The errors were a result of ineffective controls related to management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record the transactions related to the recording and tracking of the public improvement reimbursable amounts.

Please see Item 4 in this Quarterly Report on Form 10-Q for our remediation plans.

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

For the Three Months Ended February 28, 2021

(In thousands)

Statement of Operations

Recognition of public improvement reimbursables including interest income - related party

Income tax expense

Earnings per common share - Diluted

Weighted average common shares outstanding - Diluted

For the Six Months Ended February 28, 2021

(In thousands)

Statement of Operations

Recognition of public improvement reimbursables including interest income - related party

Income tax expense

Earnings per common share - Diluted

Weighted average common shares outstanding - Diluted

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

As of February 28, 2021

(In thousands)

Balance Sheet

Public improvement reimbursables - Phase 1

Income taxes payable

Accumulated deficit

NOTE 3 – RESTRICTED CASH

The Company has entered into a cash-secured performance standby letter of credit agreement with its primary bank to maintain a letter of credit related to the Company's performance obligations in the ordinary course

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.

The Company has entered into a cash-secured performance standby letter of credit agreement with its primary bank to maintain a letter of credit related to the Company’s performance obligations in the ordinary course of business.

As of May 31, 2021, the Company had a letter of credit outstanding of $ 0.3 million and has restricted cash in the same amount .

NOTE 4 – REVENUE RECOGNITION AND REIMBURSABLE COSTS

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

uncertainty of the Company’s revenue and cash flows.

The Company primarily generates revenues through two lines of business, its water and wastewater resource development business and through the sale of finished lots in its land development business,

both of which are described below.

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

Elbert and Highway 86 Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below.

The Company’s water and wastewater resource development segment provides wholesale municipal water and wastewater services, through the Rangeview Metropolitan District (the “Rangeview District”) and Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below.

The Rangeview District services Sky Ranch and other customers on the Lowry Range.

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.

Rangeview also operates and maintains the Elbert 86 District’s water system servicing Wild Pointe, a subdivision in Elizabeth, Colorado.

Monthly water usage and wastewater treatment fees – The Company provides water to customers, collects wastewater from those customers and treats that wastewater which is reused for irrigation and industrial demands.

For these services, the Company charges customers monthly potable and reuse water fees that are comprised of a base charge and a usage charge based on actual amounts of water delivered to the customer using a tiered structure that results in higher fees for higher usage.

Wastewater treatment services incur flat monthly fees.

The Company recognizes these revenues at a point in time upon delivering

water to the end use customers.

Water and wastewater tap fees – A tap constitutes a right to connect a residential or

commercial building or property to the Company’s water and wastewater systems.

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.

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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.

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

Sale of finished lots – The Company sells lots at its Master Planned Community, Sky Ranch, pursuant to distinct agreements

with each home builder.

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.

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 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.

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.

(i) payment upon the delivery of a platted lot (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot.

Ownership and control of the platted lot passes to the builder once the Company closes the sale of the platted lots.

Because the builder takes control and legal ownership of the lot at the first closing, and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs.

Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

Reimbursable public improvement costs – The Sky Ranch CAB is obligated to construct certain public improvements at Sky Ranch.

Public improvements are items that are not associated with an individual lot or home, but can be used by the public, whether living in Sky Ranch or not.

Public improvements include items such as roads, curbs, sidewalks, landscaping, and parks but also includes items such as water distribution systems, sewer collection systems, storm water systems, and drainage improvements.

These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Metropolitan District Nos.

1, 3, 4 and 5 (collectively, the “Sky Ranch Districts”), the Sky Ranch CAB, Arapahoe County, and the local stormwater authority and, after inspection and acceptance, are turned over to the applicable governmental entity to own, operate and maintain.

Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 9 – Related Party Transactions ), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note.

Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments.

During the initial development filing at Sky Ranch, the Sky Ranch CAB expended $ 32.2 million to build these public improvements, including construction support activities totaling $ 29.6 million and accrued interest of $ 2.6 million, for which the Company provided the funding.

Pursuant to the funding agreement between the Company and the Sky Ranch CAB, the expended $ 32.2 million along with the accrued interest income and project management fees are payable to the Company since the Company provided the initial funding.

In November 2019, the Sky Ranch CAB issued $ 13.2 million of bonds to recover a portion of the total $ 32.2 million expected to be received related to the public improvements constructed for the initial filing at Sky Ranch.

Upon the issuance of the bonds, the Company received $ 10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB to fund the construction of these public improvements.

Additionally, in January 2021 the Sky Ranch CAB paid the Company $ 0.4 million as a result of unencumbered funds from a 2020 budget surplus.

With the first filing nearing completion, the Sky Ranch CAB has established a tax base with revenue generation from the expected tax receipts.

Historically, the recognition of these costs was contingent upon the Sky Ranch CAB issuing bonds but as the tax base and subsequent revenues have grown, the Sky Ranch CAB has more funds and ability with which to repay the Company.

The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection due to the established and growing tax base, and as such, has recognized the reimbursable public improvements costs incurred to date at Sky Ranch.

The Company recognized an increase of $ 0.6 million to the Note receivable – related party related to Project management revenue, Other income and Interest Income - related party during the three months ended May 31, 2021, for a total outstanding receivable balance of $ 21.3 million.

This receivable is reviewed each reporting period for impairment.

For the second phase and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures.

The Sky Ranch CAB has an obligation to repay the Company but

the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060 is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred.

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.

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;

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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 receives a project

management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible public improvements.

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.

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.

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.

Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided, or expenses incurred for construction of public improvements that qualify as reimbursable expenses.

Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured.

With the first phase nearing completion, the Sky Ranch CAB has an established tax base, with which Management believes provides reasonable assurance the Sky Ranch CAB can repay the Company for qualifying expenditures.

The Company has determined that payment from the Sky Ranch CAB is probable and as such, the Company has recognized $ 23,000 and $ 1.6 million for the three and nine months ended May 31, 2021, of project management revenue for all reimbursable construction costs incurred to date and will recognize future project management revenue each period based on actual construction costs related to the public improvements when collectability is deemed to be reasonably assured.

The $ 1.6 million was recognized as a component of the Notes receivable - related party and accrues interest at 6 % per annum.

Future amounts will be added to Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

Construction support activities – The Company performs certain construction activities at Sky Ranch.

The activities

performed include construction and maintenance of the grading erosion and sediment control best management practices and other construction-related services.

These activities are invoiced to the Sky Ranch CAB upon completion and will be

recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

The 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

Payments repaid by

Sky Ranch CAB

As of May 31, 2021

Amounts payable to Pure

Payments repaid by

Cycle by the Sky Ranch

Costs incurred to date

Sky Ranch CAB

(In thousands)

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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.

Public improvements and construction support activities accrue interest of 6 % per annum, which was not previously recognized as the interest payments were deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured.

This interest was recognized as a portion of the recognition of $ 21.3 million of reimbursable costs as collection is deemed probable.

The Company expects to incur an additional $ 0.5 million through the end of the calendar year 2021, with an estimated $ 0.4 million for construction costs related to public improvements to complete the first development phase of the initial 506 lots and expects that amount to be reimbursed to the Company along with the amounts noted in the table above as the Sky Ranch CAB issues bonds, collects fees, or property tax assessments support collectability being reasonably assured.

Deferred Revenue

As noted above, the Company recognizes certain lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received.

Based on this, the Company

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

prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company

recording deferred revenue.

The Company recognizes this revenue into income as construction activities progress measured based on costs incurred to total expected costs of the project which management believes is a faithful representation of the

transfer of goods and services to the customer.

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.

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 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.

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 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.

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:

February 28, 2021

August 31, 2020

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Changes in deferred revenue were as follows:

February 28, 2021

(In thousands)

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Recognition of unearned revenue

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 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.

Balance, May 31, 2021

During November 2020, the Company received the final payment of $ 2.2 million, including $ 1.6 million for outstanding open contracts in the first development filing at Sky Ranch, which represents the final lot sales in the first filing at Sky Ranch, and $ 0.6 million for neighborhood amenities.

NOTE 5 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most

advantageous market.

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

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.

The Company had no Level 1 assets or liabilities as of May 31, 2021 or August 31, 2020.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities which include observable inputs but are not based on observable prices in active markets at the measurement date for the asset or liability.

The Company had no Level 2 assets or liabilities as of May 31, 2021 or August 31, 2020.

Level 3 valuations 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.

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 6 – WATER AND LAND ASSETS

The Company’s water rights and current water and wastewater service agreements, including capitalized terms not defined herein, are more fully described in Note 4 – Water and Land

Assets in Part II, Item 8 of the 2020 Annual Report.

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

Investment in Water and Water Systems

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

February 28, 2021

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

August 31, 2020

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Net investments in water and water systems

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.

Construction in progress primarily consists of additional water facilities at Sky Ranch and the Build-to-Rent houses.

The Company anticipates the additional facilities and houses will be placed in service during calendar 2021.

NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

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The acquisition of the Rangeview Water Supply was finalized with the signing of the Comprehensive Amendment Agreement (the “CAA”) in 1996.

CAA is explained in greater detail in Note 5 to the 2020 Annual Report.

The CAA is explained in greater detail in Note 5 to the 2020 Annual Report.

The terms and conditions of the CAA, other than whom the amounts are payable too, have not been modified since signing.

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.

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.

As of May 31, 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.

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.

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.

The Company has determined that the contingent portion of the CAA does not have a determinable fair value.

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.

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

The South Metro WISE Authority (“SMWA”) is a group of ten governmental or quasi-governmental water providers including the Rangeview District, that was formed to enable its members to

participate in a regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the “WISE Partnership Agreement,” defined below.

Each member of SMWA controls a contractually defined share of WISE

and the members’ rights and obligations with respect to WISE.

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant

facilities) to deliver water to and among the ten members of the SMWA, and to “Denver Water” and “Aurora Water,” both defined below.

Certain infrastructure has been constructed and other infrastructure will be constructed over the next several

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 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 South Metro WISE Authority (“SMWA”) is a group of ten governmental or quasi-governmental water providers including the Rangeview District, that was formed to enable its members to participate in a regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the “WISE Partnership Agreement,” defined below.

Each member of SMWA controls a contractually defined share of WISE and the members’ rights and obligations with respect to WISE.

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the ten members of the SMWA, and to “Denver Water” and “Aurora Water,” both defined below.

Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.

In December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership 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”).

During the three and nine months ended May 31, 2021, the Company through the Rangeview District, received metered water deliveries of 100 and 300 acre-feet of WISE water, paying $ 0.2 and $ 0.6 million for this water.

During the three and nine months ended May 31, 2020, the Company through the Rangeview District received metered water deliveries of 0 and 400 acre-feet of WISE water, paying $ 0 and $ 0.6 million for this water.

See further discussion in Note 9 – Related Party Transactions.

1 unchanged sentence

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.

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 .

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.

For the nine months ended May 31, 2021 and 2020, the Company recorded less than $ 0.1 million of rent expense related to its office lease.

During the nine months ended May 31, 2021 and 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.

2 unchanged sentences

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.

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.

1 unchanged sentence

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

As of February 28, 2021

As of May 31, 2021

As of August 31, 2020

8 unchanged sentences

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.

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.

As of May 31, 2021, and August 30, 2020, there were 974,965 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;

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:

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the nine months ended May 31, 2021:

Weighted Average

Exercise Price

Weighted Average

Contractual Term

Intrinsic Value

Exercise Price

Contractual Term

(in thousands)

1 unchanged sentence

Net settlement exercised

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 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:

Outstanding at May 31, 2021

Options exercisable at May 31, 2021

On January 13, 2021, the six non-employee Board members were each granted 2,000 unrestricted shares of stock.

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 month granted.

During the nine months ended May 31, 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 May 31, 2021 resulted in 8,758 shares issued and 4,242 options cancelled in settlement of shares issued.

Net settlement exercises during the nine months ended May 31, 2021 resulted in 24,035 shares issued and 13,465 options cancelled in settlement of shares issued.

There were no net settlement exercises during the three or nine months ended May 31, 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 nine months ended May 31, 2021:

Weighted Average

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Forfeited (a)

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

expected to vest is approximately three years.

Non-vested options outstanding at May 31, 2021

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

For the three months ended May 31, 2021 and 2020, the Company recorded $ 0.1 million of stock-based compensation expense.

For the nine months ended May 31, 2021 and 2020, the Company recorded $ 0.4 million of stock-based compensation expense.

At May 31, 2021, the Company had unrecognized compensation expenses totaling $ 0.6 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 two and a half years .

NOTE 9 – RELATED PARTY TRANSACTIONS

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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.

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.

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.

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.

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 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.

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.

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 February 28, 2021, is $6.2 million.

In 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 construction funding pursuant to the WISE Financing Agreement because the funding has been provided to build assets which provide capacity in the WISE infrastructure.

The Company’s total investment in the WISE infrastructure as of May 31, 2021, is $ 6.3 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.

Pure Cycle will fund the construction of the special facility and Rangeview will remit 100 % of the reimbursement 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,

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 May 31, 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

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 May 31, 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.

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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

improvements constructed from 2018 to 2023.

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 four 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.

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.

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 May 31, 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 $ 21.3 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 reimbursable costs, project management fees, and interest.

The Company recognized an increase of $ 0.6 million to the Note receivable – related party with the offsetting entry being to Project management revenue and other income during the three months ended May 31, 2021, for a note receivable balance of $ 21.3 million.

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.

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.

In addition to the note receivable balance of $ 21.3 million, the Sky Ranch CAB is obligated to refund the Company $ 0.5 million for the reimbursement of construction costs from the South Metropolitan Water Supply Authority (“SMWSA”).

These costs will be distributed to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by SMWSA in calendar year 2021.

The Company records this reimbursable cost in Trade accounts receivable, net.

Refer to Note 4 - 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

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.

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

As of the May 31, 2021 and August 31, 2020, the balances included in Notes receivable – related parties , related to the Operation Funding Agreement are immaterial.

NOTE 10 – 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

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.

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 11 – ACCRUED LIABILITIES

February 28, 2021

August 31, 2020

(In thousands)

Accrued compensation

Due to the Sky Ranch CAB - related party

Land development - warranty and other - related party

Accrued compensation

Other operating payables

Land development - warranty and other - related party

Operating lease obligations

4 unchanged sentences

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.

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.

The Company had no contingencies where the risk of material loss was reasonably possible as of May 31, 2021, or August 31, 2020.

NOTE 13 – SEGMENT INFORMATION

Because of the methods used by the Chief Operating Decision Maker (the “CODM”) to allocate resources, the Company has identified two operating segments which meet GAAP segment disclosure

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

Based on the methods used by the Chief Operating Decision Maker (the “CODM”) to allocate resources, the Company has identified two operating segments which meet GAAP segment disclosure 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 six months

ended February 28, 2021 and February 29, 2020, was done exclusively at the Company’s Sky Ranch Master Planned Community.

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 nine months ended May 31, 2021 and 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.

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:

Three Months Ended February 28, 2021

wastewater resource

Three Months Ended May 31, 2021

Land development

(In thousands)

3 unchanged sentences

Total cost of revenue

Three Months Ended February 29, 2020

wastewater resource

Three Months Ended May 31, 2020

Land development

(In thousands)

3 unchanged sentences

Total cost of revenue

Six Months Ended February 28, 2021

wastewater resource

Nine Months Ended May 31, 2021

Land development

(In thousands)

3 unchanged sentences

Total cost of revenue

Six Months Ended February 29, 2020

wastewater resource

Nine Months Ended May 31, 2020

Land development

(In thousands)

4 unchanged sentences

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, cash equivalents and

restricted cash, equipment, and related party notes receivables.

February 28, 2021

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.

August 31, 2020

4 unchanged sentences

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

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

rate of approximately 25%.

As of May 31, 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.

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

Income tax information for the three and nine months ended May 31, 2021 and 2020 are as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands)

2 unchanged sentences

Income taxes paid:

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 February 28, 2021 and August 31, 2020 are as follows:

February 28, 2021

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

August 31, 2020

Deferred tax assets (liabilities):

(In thousands)

Deferred tax assets (liabilities):

Depreciation and depletion

5 unchanged sentences

NOTE 15 – EARNINGS PER SHARE

Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than

decrease earnings 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.

Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share).

No options were excluded for the three and nine months ended May 31, 2021.

The excluded options totaled 180,000 and 0 for the three and nine months ended May 31, 2020.

Three Months Ended

Six Months Ended

Nine Months Ended

(In thousands, except share and per share amounts)

4 unchanged sentences

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