UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number
(Exact name of registrant as specified in its charter) |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
(Address of principal executive offices) | (Zip Code) |
( |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) | (Trading Symbol(s)) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 1, 2021:
Common stock, 1/3 of $.01 par value | ||
(Class) | (Number of Shares) |
PURE CYCLE CORPORATION
INDEX TO MAY 31, 2021 FORM 10-Q
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PURE CYCLE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| May 31, 2021 | ||||||
(unaudited) |
| August 31, 2020 | |||||
(In thousands, except share and | |||||||
per share amounts) | |||||||
ASSETS: | |||||||
Current assets: |
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Cash, cash equivalents and restricted cash | $ | | $ | | |||
Trade accounts receivable, net |
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Prepaid expenses and other assets |
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Land development inventories: |
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Land development - Phase 1 | | | |||||
Land development - Phase 2 | | | |||||
Public improvement reimbursables - Phase 2 | | | |||||
Income taxes receivable |
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Total current assets |
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Investments in water and water systems, net |
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Land and mineral interests |
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Other assets |
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Notes receivable – related parties, including accrued interest: |
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Public improvement reimbursables - Phase 1 | | | |||||
Other | | | |||||
Long-term land investment |
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Operating leases - right of use assets, less current portion |
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Total assets | $ | | $ | | |||
LIABILITIES: | |||||||
Current liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued liabilities |
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Accrued liabilities - related parties |
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Income taxes payable | | | |||||
Deferred lot sale revenues |
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Deferred oil and gas lease payment and water sales payment |
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Total current liabilities |
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Deferred oil and gas lease payment and water sales payment, less current portion |
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Participating interests in export water supply |
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Deferred tax liability |
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Lease obligations - operating leases, less current portion |
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Total liabilities |
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Commitments and contingencies | |||||||
SHAREHOLDERS’ EQUITY: | |||||||
Preferred stock: | |||||||
Series B – par value $ |
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Common stock: | |||||||
Par value 1/3 of $.01 per share, |
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Additional paid-in capital |
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Accumulated other comprehensive income |
| — |
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Accumulated deficit |
| ( |
| ( | |||
Total shareholders’ equity |
| |
| | |||
Total liabilities and shareholders’ equity | $ | | $ | |
See accompanying Notes to Condensed Consolidated Financial Statements
1
PURE CYCLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
(In thousands, except per share amounts) | ||||||||||||
Revenues: |
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Metered water usage from: | ||||||||||||
Municipal customers | $ | | $ | | $ | | $ | | ||||
Oil and gas operations |
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Wastewater treatment fees |
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Water and wastewater tap fees |
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Lot sales |
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Project management fees - recognized | | | | | ||||||||
Special facility projects and other |
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Total revenues |
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Expenses: | ||||||||||||
Water service operations |
| ( |
| ( |
| ( |
| ( | ||||
Wastewater service operations |
| ( |
| ( |
| ( |
| ( | ||||
Land development construction costs |
| ( |
| ( |
| ( |
| ( | ||||
Depletion and depreciation |
| ( |
| ( |
| ( |
| ( | ||||
Other |
| ( |
| ( |
| ( |
| ( | ||||
Total cost of revenues |
| ( |
| ( |
| ( |
| ( | ||||
Gross profit |
| |
| |
| |
| | ||||
General and administrative expenses |
| ( |
| ( |
| ( |
| ( | ||||
Depreciation |
| ( |
| ( |
| ( |
| ( | ||||
Operating income (loss) |
| |
| ( |
| |
| | ||||
Other income: | ||||||||||||
Recognition of public improvement reimbursables including interest income - related party | | — | | — | ||||||||
Oil and gas royalty income, net |
| |
| |
| |
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Oil and gas lease income, net |
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Interest income from investments | | | | | ||||||||
Other |
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Reimbursement of construction costs - related party |
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Income from operations before income taxes |
| |
| |
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Income tax expense |
| ( |
| ( |
| ( |
| ( | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Unrealized holding losses |
| |
| |
| |
| ( | ||||
Total comprehensive income | $ | | $ | | $ | | $ | | ||||
Earnings per common share: | ||||||||||||
Basic | $ | | $ | — | $ | | $ | | ||||
Diluted | $ | | $ | — | $ | | $ | | ||||
Weighted average common shares outstanding: | ||||||||||||
Basic |
| |
| |
| |
| | ||||
Diluted |
| |
| |
| |
| |
See accompanying Notes to Condensed Consolidated Financial Statements
2
PURE CYCLE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended May 31, 2021 | ||||||||||||||||||||||
Accumulated |
| |||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit | Total | ||||||||
(In thousands) | ||||||||||||||||||||||
February 28, 2021 balance: |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Prior period adjustment | — |
| — |
| — |
| — |
| — |
| — |
| ( | ( | ||||||||
Stock option exercises | | | | | | | | | ||||||||||||||
Stock granted for services | | | | | | | | | ||||||||||||||
Share-based compensation |
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Net income |
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May 31, 2021 balance: |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | |
Three Months Ended May 31, 2020 | ||||||||||||||||||||||
Accumulated |
| |||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit | Total | ||||||||
(In thousands) | ||||||||||||||||||||||
February 29, 2020 balance: |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Stock option exercises | | | | | | | | | ||||||||||||||
Stock granted for services | | | | | | | | | ||||||||||||||
Share-based compensation |
| |
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Net income |
| |
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| |
| |
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| |
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| | ||||||
May 31, 2020 balance: |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | |
3
PURE CYCLE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Nine Months Ended May 31, 2021 | ||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Total | |||||||
(In thousands) | ||||||||||||||||||||||
August 31, 2020 balance: |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Stock option exercises | | | | | | | | | ||||||||||||||
Stock granted for services | | | | | | | | | ||||||||||||||
Share-based compensation |
| |
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Net income |
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May 31, 2021 balance: |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | |
Nine Months Ended May 31, 2020 | ||||||||||||||||||||||
Accumulated |
| |||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit | Total | ||||||||
(In thousands) | ||||||||||||||||||||||
August 31, 2019 balance: |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Stock option exercises | | | | | | | | | ||||||||||||||
Stock granted for services | | | | | | | | | ||||||||||||||
Share-based compensation |
| |
| |
| |
| |
| |
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| |
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Net income | | | | | | | | | ||||||||||||||
Unrealized holding loss on investments |
| |
| |
| |
| |
| |
| ( |
| |
| ( | ||||||
May 31, 2020 balance: |
| | $ | |
| | $ | | $ | | $ | | $ | ( | $ | |
See accompanying Notes to Condensed Consolidated Financial Statements
4
PURE CYCLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | ||||||
May 31, | May 31, | |||||
| 2021 |
| 2020 | |||
(In thousands) | ||||||
Cash flows from operating activities: |
|
|
|
| ||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||
Depreciation and depletion | | | ||||
Share-based compensation expense |
| |
| | ||
Deferred income taxes |
| |
| | ||
Interest added to receivable from related parties |
| ( |
| ( | ||
Proceeds from CAB reimbursement applied to land development inventories |
| |
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Changes in operating assets and liabilities: | ||||||
Trade accounts receivable |
| ( |
| | ||
Prepaid expenses |
| ( |
| ( | ||
Land development inventories |
| ( |
| | ||
Taxes receivable | — | ( | ||||
Recognition of public improvement reimbursables, including interest | ( | — | ||||
Taxes payable net of taxes receivable | | — | ||||
Accounts payable and accrued liabilities |
| ( |
| ( | ||
Deferred revenues |
| ( |
| ( | ||
Other assets and liabilities |
| ( |
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Net cash provided by operating activities |
| |
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Cash flows from investing activities: | ||||||
Investments in water, water systems and land |
| ( |
| ( | ||
Purchase of property and equipment |
| ( |
| ( | ||
Sale and maturities of short-term investments |
| |
| | ||
Purchase of short-term investments |
| |
| ( | ||
Net cash used by investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Proceeds from exercise of options |
| |
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Payments to contingent liability holders |
| ( |
| ( | ||
Net cash provided by financing activities |
| |
| | ||
Net change in cash, cash equivalents and restricted cash |
| ( |
| | ||
Cash, cash equivalents and restricted cash – beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash – end of period | $ | | $ | | ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | — | ||||
Total cash, cash equivalents and restricted cash | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES | ||||||
Transfer of land development costs to other assets | $ | | $ | — | ||
Transfer of land development costs to inventory | $ | | $ | — | ||
Changes in Land development inventories included in accounts payable and accrued liabilities | $ | | $ | | ||
Changes in Investments in water, water systems and land included in accounts payable and accrued liabilities | $ | | $ | ( | ||
Income taxes paid | $ | | $ | |
See accompanying Notes to Condensed Consolidated Financial Statements
5
PURE CYCLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2021
NOTE 1 – PRESENTATION OF INTERIM INFORMATION
The May 31, 2021 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended May 31, 2021 and 2020, the condensed consolidated statements of shareholders’ equity for the three and nine months ended May 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended May 31, 2021 and 2020 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. The unaudited condensed consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2021, and for all periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that the accompanying condensed consolidated financial statements and notes be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 10, 2020. The results of operations for interim periods presented are not necessarily indicative of the operating results expected for the full fiscal year. The August 31, 2020 balance sheet was derived from the Company’s audited consolidated financial statements.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. COVID-19 has delayed the second phase of the Sky Ranch development revenue recognition due to the extended time taken to approve the platted lots through the County Government. Other than the delay of the approval of the platted lots, there has not been a material impact to the Company’s condensed consolidated financial statements as a result of the CARES Act.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for certain items such as revenue recognition, timing and amount of reimbursable costs and expenses and the associated repayment, costs of revenue for lot sales, share-based compensation, deferred tax asset and liability valuation, depreciation, and the recoverability of long-lived assets. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.
During the nine months ended May 31, 2021, the Company revised its estimates to conclude that the reimbursable public improvements, project management revenue and interest income related to the first development phase at Sky Ranch are reasonably assured of payment. Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), the Company was unable to estimate when or if it would receive payment for these items and deferred recognition of them until the cash was received from the Sky Ranch CAB. As a result of an established and growing tax base resulting from the success of the initial filing, added mill levies, and additional unencumbered fees received by the Sky Ranch CAB, the Company believes repayment of the public improvements, payment of the project management fees, and interest income are deemed reasonably assured. Based on this, the Company has recognized these items in the Company’s consolidated financial statements. The timing and amount of these potential payments have been estimated by the Company based on sales and growth trends utilizing current assessed home values and historic growth rates which have been projected to the current and contracted for lot sales through the contractual obligation period.
6
Recently Issued Accounting Pronouncements
The Company continually assesses new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and to ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 was set to be effective for public companies on January 1, 2020; however, the FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, the Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.
NOTE 2 – PRIOR PERIOD ADJUSTMENT
The Company discovered certain errors in the amounts previously reported for the three and six months ended February 28, 2021, which if these errors though immaterial in the given periods, were corrected in the three months ended May 31, 2021, management believes these corrections would have a material impact on the current reported three month consolidated statement of operations, specifically the recognition of Public improvement reimbursables including interest income - related party. The Company’s President and the Chief Financial Officer evaluated the effects of the errors on the consolidated financial statements for the three and six months ended February 28, 2021, which each concluded that the errors were not material to those presented results. Based on this evaluation, the errors did not rise to the level of requiring a restatement of the financial information for the three and six months ended February 28, 2021, contained in the Form 10-Q as previously filed. Accordingly, management has corrected these errors by adjusting opening accumulated deficit for the three month period ended May 31, 2021 and has retrospectively adjusted the cumulative periods for the impact of such errors in the financial statements presented for the three and nine months ended May 31, 2021. The errors were a result of ineffective controls related to management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record the transactions related to the recording and tracking of the public improvement reimbursable amounts. Please see Item 4 in this Quarterly Report on Form 10-Q for our remediation plans.
7
The effect of the errors to the Company’s consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2021 were as follows:
For the Three Months Ended February 28, 2021 | |||||||||
| As Reported |
| Adjustments |
| As Adjusted | ||||
(In thousands) | |||||||||
Statement of Operations | |||||||||
Other Income | |||||||||
Recognition of public improvement reimbursables including interest income - related party | $ | | $ | ( | $ | | |||
Income tax expense | $ | ( | $ | | $ | ( | |||
Net Income | $ | | $ | ( | $ | | |||
Earnings per common share - Diluted | $ | | $ | ( | $ | | |||
Weighted average common shares outstanding - Diluted | | | | ||||||
For the Six Months Ended February 28, 2021 | |||||||||
| As Reported |
| Adjustments |
| As Adjusted | ||||
(In thousands) | |||||||||
Statement of Operations | |||||||||
Other Income | |||||||||
Recognition of public improvement reimbursables including interest income - related party | $ | | $ | ( | $ |